Even as global crude oil prices continue to trade significantly low and imports have also gone down following the coronavirus outbreak, a sharp outflow of funds by foreign portfolio investors (FPIs), looking for safer havens amidst the current global uncertainty, pulled India’s foreign exchange reserves sharply down by $12 billion in the week ended March 20. The reserves were down to $469.9 billion, from $481.9 billion a week back on March 13.
While the foreign exchange reserves had hit an all time high of $487.23 billion on March 6, they fell sharply by $17.3 billion over the next two weeks. The decline has been primarily driven by outflow of funds by FPIs as they pulled out over $15 billion in March till date. The outflow has also led to a steep fall in the stock markets, as the Sensex at the BSE has fallen by 8,482 points, or 22.1 per cent, this month.
According to data released by the Reserve Bank of India (RBI), while the forex reserves fell by $12 billion in the reporting week ended March 20, the decline in reserves was mainly on account of decrease in foreign currency assets that fell $10.2 billion to $437.1 billion from a high of $451.13 billion on March 6, 2020.
The global spread of coronavirus over the last couple of months — which has so far claimed over 27,000 lives — has not only roiled stock markets but is threatening to pull global growth significantly down as economic activity has been hit badly. It has, thereby, pushed investors to seek refuge in safer investment destinations and instruments, leading to outflow of funds.
Indian foreign exchange reserves had a smooth run over the last six months as they rose week-on-week for nearly six months. While FPIs invested a net of Rs 58,337 crore, or nearly $8 billion, between September 2019 and February 2020, a relatively low crude oil price also helped the rise in foreign exchange reserves.
Since September 20, 2019, when Finance Minister Nirmala Sitharaman announced a cut in corporate tax rates, the 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, meanwhile, were a blessing in disguise for India during this period.
As crude oil amounts for almost 20 per cent of the country’s import bill, crude prices trading at levels of around $26 per barrel (down from $52 per barrel a month ago) provides India a lot of 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.
On March 23, the government raised the cap on special additional excise duty on petrol and diesel to Rs 18 and Rs 12 per litre, respectively, as per the amendments in the Finance Bill passed in the Parliament Monday. The change in the cap will enable the government to raise duties on petrol and diesel by another Rs 8 per litre each.
It is important to note that, while there was a sudden spike in global crude oil prices in January, following the geopolitical tensions between United States and Iran and it hit a 8-month high of $70.25 per barrel on January 6, 2020, the prices fell sharply following the de-escalation of tensions, until the outbreak of coronavirus in China.
Analysts believe that the decline in crude oil prices following the outbreak of coronavirus will help India as it will reduce India’s annual import bill and also provide the government with a window to raise some additional resources.