Even as July has seen significant outflow of funds by foreign portfolio investors (FPIs) from Indian markets following the Budget announcements earlier this month, an overall strong inflow of funds this year by FPIs in both equity and debt markets saw India’s foreign exchange reserves hit an all-time high of $430.37 billion in the week ended July 19, 2019.
This year, the Reserve Bank of India also conducted currency swaps worth $10 billion, which also added to the forex kitty. The inflows have come on the back of a stable rupee and relatively lower crude oil prices.
Having hit a high of $426 billion in April 2018, the forex reserves slid in the second half of 2018 following a rise in crude oil prices, outflow of FPI money and decline in rupee value against the dollar.
Stronger Reserve Bank war chest for difficult times
The rise in forex reserves to over $430 billion as on July 19, 2019 — compared to $428.80 billion a week earlier —provides the Reserve Bank of India a strong war chest to cushion for unfavourable times. A relatively lower global crude oil prices, stable rupee this year and outcome of the general elections in May provided comfort to foreign portfolio investors leading them to invest a net of over Rs 92,000 crore into Indian equity and debt markets.
However, as the crude price stabilised and rupee recovered from its lows of over 74 to a dollar (recorded in October 2018), the foreign exchange reserves have jumped from $393.4 billion on December 28, 2018 to $430 billion on July 19, 2019.
Since the beginning of this calendar year, FPIs have pumped in a net of Rs 92,275 crore into Indian securities market. While Rs 62,939 crore have been routed into the Indian equities, Rs 20,615 crore came into the debt market.
July has seen subdued FPI activity into the markets, especially after the Budget announcements that proposed to increase surcharge on incomes over Rs 2 crore.
Experts say that it will impact taxation on FPIs that operate on a trust structure. This month, FPIs have pulled out a net of Rs 14,382 crore from the Indian equities. They, however, invested a net of Rs 10,624 crore into the debt instruments.
By comparison, FPIs had pulled out a net of Rs 83,254 crore from the Indian equities and debt market.
While the outflow from equities amounted to Rs 33,553 crore, that from the debt markets amounted to Rs 49,543 crore. Of the total outflow in 2018, just two months — September and October — witnessed net outflows of Rs 59,939 crore, thereby putting pressure on rupee and also resulting into a decline in forex reserves.
In October 2018, the rupee had fallen to its all-time low of 74.34 against the dollar in line with the rising crude oil prices and RBI had to intervene to stem the slide of rupee against the dollar following capital outflows from the debt and equity markets.
The Brent crude oil prices had hit a high of around $86 per barrel, in the same month, putting pressure on rupee and India’s current account deficit. However, as the crude oil prices fell over the following months to levels of around $52 per barrel by the end of December 2018, it offered a much needed relief to the rupee and the economy. On Friday, July 26, the Brent crude was trading at $63.5 per barrel and the rupee closed at 68.89 against the dollar. A stability in crude oil prices and rupee gave investors the much needed confidence to invest in the country.
High in crude oil prices hurts the Indian economy significantly as crude imports account for almost one fourth of India’s import bill.
While the forex reserves fell in line with rising crude oil prices and FPI outflows, the decline got arrested in November and started to rise beginning January 2019. Over the last seven months, the forex reserves have grown by almost $37 billion.
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