A significant jump in foreign portfolio investment inflows over the first two weeks this year, coupled with drop in foreign currency outflow on account of sharp decline in global crude oil prices and dip in imports from China over the last month following the outbreak of coronavirus — which has till now claimed over 1,400 lives in China and is threatening its exports and economy — has resulted in a spike in India’s foreign exchange reserves.
The reserves jumped to an all-time high of $473 billion in the week ended February 7, as they grew by $1.71 billion over the week ended January 31.
In one of the biggest expansions in forex reserves in recent times, the reserves have grown by $10.86 billion in last three weeks. Earlier, in the three-week period between September 20 and October 11, the reserves swelled by $11.3 billion. This was after the Finance Minister announced a sharp cut in corporate tax rates from 30 per cent to 22 per cent (exclusive of surcharge and cess).
As the reserves rose again in the week ended February 7, the sweet run of forex expansion has now continued for the 20 weeks — or five months — since September 20, 2019.
According to the data released by the Reserve Bank of India, while the foreign exchange reserves increased by $1.71 billion in the reporting week ended February 7, the rise in reserves was mainly on account of an increase in foreign currency assets that rose $1.94 billion to $439.18 billion. The gold reserves in the same week declined by $218 million to $28.77 billion.
Since the Budget announcement on February 1, foreign institutional investors (FIIs) have pumped in a net of Rs 24,623 crore into Indian capital markets.
Crude prices may stay low due to coronavirus impact
While rising foreign fund inflows and lower crude oil prices have helped India raise its foreign exchange reserves to record highs, the impact of coronavirus on China’s economy activity over the next few months may keep the global crude oil prices lower, thereby benefitting India by way of lower import bill.
Since September 20, 2019, when Finance Minister Nirmala Sitharaman announced a cut in corporate tax rates, foreign portfolio investors (FPIs) have pumped in a net of Rs 78,676 crore (around $11 billion).
In the same period, the foreign exchange reserves have grown $44.4 billion — from $428.5 billion in September 20, 2019 to $473 billion in the week ended February 7, 2020.
It is important to note that, while there was a sudden spike in global crude oil prices in January — following the geopolitical tensions between the United States and Iran and hit a 8-month high of $70.25 per barrel on January 6, 2020 — it fell sharply following the de-escalation of tensions and then the outbreak of coronavirus in China.
While the Brent crude price hit a low of $53 per barrel on February 10, it was trading at around $57 per barrel on Friday.
The continued inflow of funds by foreign investors, despite a slowdown in economic growth, has fuelled the rise in forex reserves.
While investor sentiment turned weak after the Budget announcement last July to impose higher surcharge, market participants say that the impact of the government’s decision to reverse its Budget 2019 decision on higher surcharge on FPIs along with a cut in the corporate tax rate in September played a significant role in turning the investors’ mood and draw them to invest in the Indian economy and markets.
While a decline in global crude oil prices has played an important role in keeping India’s import bill under check, the impact of coronavirus on China’s economy over the next few months is likely to keep global crude oil prices lower.
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