India’s foreign exchange reserves topped the $400 billion mark for the first time to hit an all-time high of $400.726 billion on September 8, aided by a sharp rise in foreign currency assets, mainly huge inflows through foreign direct investments in projects and portfolio investment.
After hitting the $300 billion mark in 2008, it took the country over nine years to cross the $400 billion level. Foreign exchange reserves had earlier topped $300-billion in March 2008, months before the global financial crisis hit Indian rupee and the economy. In August 2013, the rupee plummeted to an all-time low of 68.85 against the dollar following the US Federal Reserve’s decision to roll back its stimulus programme. Raghuram Rajan, who was RBI Governor then, announced a series of measures to shore up the rupee and foreign exchange reserves, leading to a gradual strengthening of the rupee and steady build-up of forex reserves.
India is now in the sixth position in forex reserves ranking, ahead of Taiwan, Brazil and euro zone. But China is way ahead topping the table with reserves of $3,053 billion. Japan is in the second position with reserves of $1,188 billion, followed by Switzerland with $743 billion.
On Friday, the Reserve Bank of India said foreign currency assets were $376.20 billion, gold reserves at $20.69 billion, SDRs of $ 1.52 billion and $2.30 billion reserves in IMF. However, the huge reserves have not given adequate returns to the country. The RBI’s return from foreign currency assets is now only 0.80 per — the lowest in the last 15 years — compared with 1.29 per cent in 2015-16. Its foreign currency assets are invested in various securities, other central banks and commercial banks abroad during the year ended June 2017.
The big rise in forex reserves is to due to inflows through foreign direct investment and portfolio investment in the capital market. Foreign investors pumped in Rs 42,659 crore (around $ 6.7 billion) in stocks and Rs 131,565 crore ($20.55 billion) in debt instruments in calendar 2017. However, market analysts are expecting a slowdown in FPI inflows. While the market witnessed outflows from the stock market in August and September, FPIs are close to reaching their debt investment limit. The rise in inflows was the major reason for the appreciation of the rupee — which closed at 64.08 against dollar on Friday.
Analysts have cautioned about Q2, saying that inflows would taper off and that CAD would widen further. “Going ahead, the second quarter will be challenging as the trade deficit has been widening till August. With crude prices up, pressure will continue to mount on import bill. We need to have software and remittance receipts to increase which are contingent on the state of world economy and US policy to immigration and outsourcing. This needs to be watched carefully. Support from FPIs would be less strong as the flow to debt segment will slow down given that the limits are being reached,” said Madan Sabnavis, chief economist, Care Ratings.