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Saturday, April 04, 2020

Forex reserves decline for first time in 25 weeks

For the week-ended March 13, forex reserves stood at $481.89 billion and it fell $5.35 billion from the all-time high of $487.23 billion in the week-ended March 6, 2020.

By: ENS Economic Bureau | New Delhi | Updated: March 21, 2020 4:53:34 am
foreign exchange reserves, india fpi, forex reserve decline, fpi investment, foreign portfolio investors, india forex reserve, indian economy The decline is primarily driven by sharp outflow of funds by FPIs over the past three weeks. (File Photo)

Following a sharp outflow of funds by foreign portfolio investors from the Indian securities market over the last couple of weeks, after the global scare around the spread of the coronavirus, foreign exchange reserves witnessed their first weekly decline in 25 weeks, or six months. For the week-ended March 13, forex reserves stood at $481.89 billion and it fell $5.35 billion from the all-time high of $487.23 billion in the week-ended March 6, 2020.

The decline is primarily driven by sharp outflow of funds by FPIs over the past three weeks. According to data sourced from CDSL and stock exchanges, FPIs have sold net holdings worth Rs 1.13 lakh crore, or $15.3 billion, in March (till Friday). The outflow has also led to a steep fall in the stock markets as the Sensex has lost 8,383 points, or 21.2 per cent, this month.

Between September and February, FPIs invested a net of Rs 58,337 crore or nearly $8 billion.

According to the data released by the Reserve Bank of India, while foreign exchange reserves fell by $5.35 billion in the reporting week-ended March 13, the decline in reserves was mainly on account of a decrease in foreign currency assets, which fell $3.8 billion to $447.35 billion from a high of $451.13 billion, a week back.

Despite the decline in reserves over the week-ended March 13, forex reserves are, anyway, up by $53 billion since September 20, 2019.

Since September 20, when the Finance Minister announced a cut in corporate tax rates, forex reserves have been rising week-on-week and shot up to an all-time high of $487.23 billion in the week-ended March 6, 2020.

A sharp decline in global crude oil prices, however, has been a blessing in disguise for India during this period. As crude oil amounts for almost 20 per cent of India’s import bill, crude prices coming down to levels of $28 per barrel over the last couple of weeks provides comfort on the current account front. It has also given central government the headroom to raise the duty on petrol and diesel prices by Rs 3 per litre.

As the coronavirus poses threat to global economic growth, it has resulted into a sharp decline in Brent crude oil prices, and they fell to an 18-year low during the week, before retreating to trade at $28 on Friday.

It is important to note that while there was a sudden spike in global crude oil prices in January, following the geopolitical tensions between US and Iran and it hit an 8-month high of $70.25 per barrel on January 6, 2020, it fell sharply following the de-escalation of tensions, till the outbreak of the coronavirus in China.

Many feel that the decline in crude oil prices following the outbreak of coronavirus will help India as it will reduce India’s annual import bill.

In a tweet, couple of weeks back, Uday Kotak, MD & CEO, Kotak Mahindra Bank said, “Amidst turbulence and the virus, some good news- oil at $45/barrel. Recent $20 drop saves India $30 billion per annum. Also global interest rates have collapsed making money cheap. Let’s leverage these for policy to boost growth.”

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