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Tuesday, December 01, 2020

In eight months, forex reserves rise by more than $100 billion

This jump of 22 per cent has come following a sharp decline in imports alongside strong foreign investment inflows in the second half of the calendar year.

Written by Sandeep Singh , Sunny Verma | Mumbai | Updated: November 22, 2020 12:25:24 am
Rising foreign exchange reserves provide for external sector stability and also cover for imports.

THOUGH THE Covid-19 pandemic has hit the economy on different fronts over the last eight months, the foreign exchange reserves have risen by over $100 billion when the lockdown was announced in March-end. This jump of 22 per cent has come following a sharp decline in imports alongside strong foreign investment inflows in the second half of the calendar year.

While the forex reserves stood at $469.9 billion in the week ended March 20, 2020, it has risen by $102.8 billion since then and to touch $572.7 billion in the week ended November 13, 2020. RBI data released on Friday shows that reserves grew by $4.2 billion in the week ended November 13.

Between April and November, while foreign portfolio investments (FPI) amounted to Rs 1,40,295 crore (nearly $19 billion), the net FDI between April and September aggregated to $22.85 billion. Besides this, a sharp decline in imports of crude oil, electronics and gold due to a lockdown in many parts of the world between March and May, prevented even normal drawdown of reserves.

According to data available with the Petroleum Planning and Analysis Cell under the Ministry of Petroleum and Natural Gas, the net crude oil import declined sharply between April and September this year to $19.3 billion. It was as high as $83.2 billion for the full year 2019-20.

Explained

Reserves provide comfort

As GDP growth remains a concern for 2020-21, rising forex reserves provide comfort to the government and the RBI. It sufficiently covers the import bill of the country. Reserves also provide confidence to markets that the country can meet its external obligations and has reserves for national disasters or emergencies.

Similarly, the value of gold imports during April-October 2020 fell to $9.2 billion compared with $17.6 billion in the corresponding period last year according to data obtained from the Ministry of Commerce. The value of electronic goods imports too declined from $34.7 billion in April-October 2019 to $28.6 billion during April-October 2020.

Rising foreign exchange reserves provide for external sector stability and also cover for imports. Almost six months back when reserves had risen to $487 billion in the week ended May 15, RBI Governor Shaktikanta Das had noted they are “equivalent to 12 months of imports.”
Economists say a rise in foreign exchange reserves in combination with benign oil prices and tepid imports, has helped the Indian rupee remain broadly stable since mid-March 2020. There has, however, been deterioration in not just the growth prospects but some other macro parameters such as retail inflation and fiscal deficit. While the rupee hit a low of 76.97 against the dollar on April 21, 2020, it has recovered over the last eight months and closed at 74.16 Friday.

High reserves provide the central banks the ability to intervene in the currency markets if required to stabilise volatility in rupee-dollar exchange rate, and also use it as a tool for inflation management. With higher foreign investment inflows, RBI has been buying dollars from the market and in doing so, it releases an equal amount in rupees through issuance of bonds and securities and LAF operations, resulting in higher liquidity.

“Accumulation of dollars is enhancing liquidity in the banking system, keeping bond yields in check and supporting effective transmission On the back of purposeful dollar buying by RBI, rise in gold reserves and foreign currency assets, India’s foreign exchange reserves stood high at $560.53 billion as on 23rd October, 2020, covering more than 13 months of imports,” the finance ministry said in its October monthly economic review.

India’s foreign exchange reserves started rising significantly from September 2019. While the foreign exchange reserves stood at $428 billion in the week ended September 20, 2019, it has risen by $144 billion over the last 14 months to hit a high of $572.7 billion in the week-ended November 13.

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