Positive flow of funds from foreign portfolio investors (FPIs), along with a decline in forex outgo on account of continued slide in crude oil prices and stable currency, has resulted in a substantial jump in the foreign exchange reserves, which hit an all-time high of $439.7 billion for the week ended October 11.
According to the data released by the RBI, forex reserves have risen over $11 billion over the last four weeks, from $428.5 billion in the week ended September 20 to $439.7 billion on October 11, 2019.
The rise has been in line with the slide in crude prices — a 10 per cent fall from $64.5 per barrel on September 20 to under $58 per barrel in the first week of October.
Even the FPIs have been supportive over the past one month. While they pulled out a net of Rs 8,874 crore between July and August (aggregate of debt and equity markets), over the last month they have invested a net of Rs 15,300 crore (nearly $2.1 billion).
Experts say the Centre’s various decisions over the past few weeks have played a significant role in turning investors’ mood.
The rise in forex reserves, alongside a softening of crude oil prices, comes as a breather for the country’s rising external debt, which has risen significantly over the last couple of years — from $485 billion in June 2017 to $557 billion in June 2019. Experts say if external debts are higher than the forex reserves, it makes the economy vulnerable to any oil price shocks. However, there is some relief now as forex reserves are climbing and crude prices are trading lower. A rise in forex reserves will help improve the ratio of foreign exchange to external debt which has deteriorated from a high of 106 per cent in June 2010 to 76.7 per cent in June 2019. It is noteworthy that during the height of the global financial crisis in 2008, India’s forex reserves, at $310 billion, exceeded the then external debt of about $224 billion, and provided a much larger coverage.
Over the past one year, there has been a rise in external debt as India Inc has turned towards foreign markets to raise funds. This has happened because of the liquidity situation tightening in the domestic financial market.