India’s foreign exchange reserves have zoomed by over $103 billion in the current fiscal, as of December 25. And with more than three months left, it looks set to surpass the all-time-high increase of $110.5 billion recorded in 2007-08.
The difference in context between the official reserve accretion then and now, however, is as much as chalk and cheese. In 2007-08, the economy was booming, registering a gross domestic product growth of 9.3 per cent on top of 9.6 per cent and 9.5 per cent in the preceding two years. The Centre’s fiscal deficit, too, was a mere 2.5 per cent of GDP. India could, then, easily withstand the shock from the global economic crisis that followed one year later.
The economy has, by contrast, contracted by 14.9 per cent year-on-year in April-September 2020-21 and the Reserve Bank of India (RBI) expects growth for the whole fiscal to be -7.5 per cent (on top of a dismal 3.9 per cent for 2019-20). Nor are government finances in great shape, with the most optimistic projection of the Centre’s fiscal deficit for 2020-21 at 6.5-7 per cent of GDP (as against the budgeted 3.5 per cent).
In 2007-08, the $110.5-billion reserve build-up, amounting to 7.4 per cent of India’s then much-smaller GDP, was powered largely by foreign investment, external commercial borrowings and other capital inflows totaling $107.9 billion.
These inflows were more a result of ‘pull’ factors, having to do with global investors wanting to partake of the India growth story. The forex reserve accumulation in 2020-21 has been driven mainly by the country’s current account balance — the gap between exports and imports — turning positive at $34.7 billion during April-September. This surplus has, in turn, been due to imports in April-September 2020 falling by a massive $95.6 billion over April-September 2019. And that is further reflective of low import demand in a shrinking economy.
The current account surplus has also been supplemented by some foreign capital inflows. Reliance Industries alone, for instance, attracted global investments aggregating Rs 1,99,321 crore (about $27 billion) in its Jio Platforms digital and retail businesses between April 22 and November 9. Foreign portfolio investors, too, have pumped $28.65 billion into Indian equity and debt markets so far this fiscal. But total foreign capital inflows, net of debt repayments and other outflows, have been only $16.5 billion, as per RBI data for April-September 2020.
Moreover, unlike in 2007-08, the capital flows coming in now seem to be more courtesy ‘push’ than ‘pull’ factors. With 10-year US treasury yields currently at 0.91 per cent — they are even lower at 0.19 per cent for UK, 0.01 per cent for Japanese and minus 0.58 per cent for German government bonds of the same tenure — investors are being pushed to seek returns in emerging market economies offering relatively higher returns. Some of that dollar liquidity has been flowing into India, especially since November.
All in all, it makes for an extraordinary situation — of record forex reserves build-up when the economy is experiencing negative growth for the first time in 41 years and amid an unprecedented global pandemic.