India’s Forex reserves cross the milestone of $ 600 Bn

Introduction:

Foreign exchange reserves soared up to $605 billion in the week to June 4, 2021, as the RBI mopped up dollars flowing into the nation’s booming stock market as well as via foreign direct investments.

Foreign Exchange Reserves:

• India’s foreign exchange reserves surged by $ 3.074 billion to reach a record high of $ 608.081 billion in the week ended June 11, the latest data from the Reserve Bank of India (RBI) showed on Friday.
• The country’s foreign exchange reserves crossed $ 600 bn for the first time. RBI’s weekly data showed that the rise in reserves was on account of an increase in foreign currency assets, which is a major component of the overall reserves.
• Foreign currency assets rose by $ 2.567 bn to $ 563.457 bn, according to the data. The gold reserves rose by $ 496 Mn to $ 38.101 bn. With this development, India is the 5th largest reserve holding country in the world.
• On a YoY basis forex reserves increased by 20.8% in March 2021 as against an increase of 15.7% in the corresponding period of the previous year.
• The negative/low-interest-rate environment, which is expected to persist in the times to come, is posing challenges to the central banks across the globe, for effectively managing forex reserves without compromising the strategic objectives of deployment of forex reserves.

Are India’s reserves adequate?

• According to new research from RBI, India’s record-high $600+ billion of foreign exchange reserves might not be good enough, as it falls short on few measures including import cover and liability outflows.
• The report states that “While foreign exchange reserves provide cushions against unforeseen external shocks, levels are often deceptive, and a better gauge of external vulnerability is an assessment of specific indicators. In terms of projected imports for 2021-22, the current level of reserves provides cover for less than 15 months, which is less than the 39 months cover offered by Switzerland’s reserves, 22 by Japan’s, 20 by Russia’s, and 16 months by China’s pile.”
• India’s net international investment position (assets over liabilities) is -12.9% of gross domestic product, which means that the liabilities owed to foreigners are more than assets.
• The researchers said that these factors warrant a pragmatic assessment of reserve adequacy on FX reserves, including exposure to valuation changes and market risk in a world of heightened global uncertainty.

Conclusion:

In the recent annual report, the RBI had said that they are planning to explore new asset classes and markets for deployment of foreign currency assets as they want to diversify their portfolio and seek higher returns. Currently, the RBI invests only in gold and sovereign debt.