India’s forex reserves were at $578.4 billion as of March 2023—a fall of over $28 billion since March 2022, $19.7 billion of which was due to valuation changes, as per RBI. Dollar appreciated after the US Fed hiked rates and India’s balance of payment (BoP) saw lower net capital inflows. This trend reversed with the dollar index peaking last October as expectations of further Fed rate hikes waned. Forex reserves jumped this year primarily due to revaluation gains as the dollar weakened and capital flows rose. Also, oil imports from Russia are not settled in dollar, which has also added reserves.
India’s forex reserves were at $578.4 billion as of March 2023—a fall of over $28 billion since March 2022, $19.7 billion of which was due to valuation changes, as per RBI. Dollar appreciated after the US Fed hiked rates and India’s balance of payment (BoP) saw lower net capital inflows. This trend reversed with the dollar index peaking last October as expectations of further Fed rate hikes waned. Forex reserves jumped this year primarily due to revaluation gains as the dollar weakened and capital flows rose. Also, oil imports from Russia are not settled in dollar, which has also added reserves.
Is this level of forex reserves sustainable?
Rate hikes in the US trigger an inflow of foreign investments to the US treasury and, simultaneously, an outflow of capital from India. The US Fed has hiked rates by 75 basis points so far this year. Expectations are that the Fed may deliver a final rate hike of 25 basis points when it meets this week. This could increase capital inflows into emerging markets such as India. Also, there is a significant improvement in BoP with current account deficit now projected at less than 2% of GDP. There is resumption in equity capital flows with India continuing to attract maximum flows among emerging market peers.
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Is this level of forex reserves sustainable?
Rate hikes in the US trigger an inflow of foreign investments to the US treasury and, simultaneously, an outflow of capital from India. The US Fed has hiked rates by 75 basis points so far this year. Expectations are that the Fed may deliver a final rate hike of 25 basis points when it meets this week. This could increase capital inflows into emerging markets such as India. Also, there is a significant improvement in BoP with current account deficit now projected at less than 2% of GDP. There is resumption in equity capital flows with India continuing to attract maximum flows among emerging market peers.
Where does India’s forex reserve stand globally?
India stands fourth among countries with the highest forex reserves. China, Japan and Switzerland are the top three, respectively. Most countries, barring India, run large and persistent current account surpluses since they have a competitive exports market. India, Brazil, and the US have built reserves through capital flows instead of huge current account surplus.
How are forex reserves measured?
The RBI’s forex reserves refer to the assets the central bank holds to provide import cover and protect against external shocks. It has four components: foreign currency assets, gold, special drawing rights and reserve position in the IMF. RBI revalues these assets every week. Forex reserves are influenced by movements in exchange rates and gold prices. A depreciation of the US dollar or higher gold prices causes valuation gains. A strong dollar or fall in gold prices brings down the value of the non-dollar portion of the reserves.
What is RBI’s plan to diversify forex kitty?
The RBI plans to internationalize the rupee as a means to reduce dependence on foreign currencies. It is also exploring the use of currencies of member states of Asian Clearing Union, including rupee for payment and settlement among themselves. Further, it has entered into an agreement with Cental Bank of Sri Lanka to enable rupee to be used as a designated foreign currency to promote trade between the two countries and to allow Indian tourists travelling to Sri Lanka to use rupee for transactions.
Read More: What has flipped the forex reserve decline of India?