Foreign exchange reserves rose for the 17th straight week to hit an all-time high of $462.15 billion for the week ended January 17. While the government will present its budget for 2020-21 on February 1, it will be keenly watched by foreign portfolio investors and global businesses as they make their calls for future investment and additional inflows to India.
Led by strong foreign direct investment, foreign portfolio investments and relatively stable global crude oil prices over the last year (except for temporary spikes), foreign exchange reserves in the country shot up $33 billion since the week ended September 20, when Finance Minister Nirmala Sitharaman announced a sharp cut in corporate tax rates.
Eye on Budget, fiscal road map to decide future
While forex reserves have been expanding, the forthcoming Budget 2020-21 will define its future trajectory. At a time when the economy is undergoing a slowdown, the government’s fiscal road map and growth trajectory will be instrumental in attracting foreign investments.
While a sudden spike in global crude oil price (earlier this month) following the growing geopolitical tension between the US and Iran posed a potential threat to rise in global crude oil prices, which could have in turn impacted the expansion of forex reserves in India going forward, a de-escalation in tension eased the prices within a week.
According to the weekly data released by the Reserve Bank of India, forex reserves rose by $940 million in the week ended January 17, 2020. The reserves have grown sharply over the last four months. It has grown week after week over the past 17weeks.
On September 20, the FM announced a cut in corporate tax rates — a move that was termed as one that would propel investments into the Indian economy.
While FPIs invested a net of $19.4 billion into the Indian capital markets in 2019, the FDI equity inflows in the first nine months of the calendar 2019 amounted to $36.97 billion.
This continued inflow of funds by foreign investors despite a slowdown in economic growth has fuelled the rise in forex reserves.
In the reporting week ended January 17, the rise in reserves was mainly on account of an increase in foreign currency assets, a major component of the overall reserves, which surged by $867 million to $428.449 billion. During the week, gold reserves also increased by $28.56 billion. In January to date, FPIs have invested a net of $234 million into Indian capital markets.
While investor sentiment turned weak after the Budget announcement last July to impose higher surcharge, market participants say the government’s decision to reverse its Budget decision relating to higher surcharge impact on FPIs, along with a cut in the corporate tax rate in September, played a significant role in turning the investor mood and drawing them to invest in the Indian economy and markets.
While stability in global crude oil prices has played an important role in keeping India’s import bill under check, the Budget announcements next week may provide some clarity to FPIs on future investments in the country.
The rise in forex reserves over the last four months has also come as a breather for the country’s rising external debt, which rose significantly over last couple of years from $485 billion in June 2017 to $557 billion in June 2019.
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