Forex reserves soar $103 billion in April-December 2020
iasparliament
January 04, 2021
What is the issue?
India’s foreign exchange reserves have risen by over $103 billion as of 25 December 2020 which is set to surpass the all-time-high increase of $110.5 billion recorded in 2007-08 by end of the fiscal.
Though the reserve positions are comparable, the context between the official reserve accretion then and now is different.
Why is it totally different now from 2007-08?
In 2007-08, the economy was booming, registering a GDP growth of 9.3% on top of 9.6% and 9.5% in the preceding 2 years.
The Centre’s fiscal deficit, too, was a mere 2.5% of GDP.
India could, then, easily withstand the shock from the global economic crisis that followed one year later.
In contrast, the economy has now contracted by 14.9% year-on-year in April-September 2020-21.
The RBI expects growth for the whole fiscal to be -7.5% (on top of a dismal 3.9% for 2019-20). Nor are government finances in great shape.
The most optimistic projection of the Centre’s fiscal deficit for 2020-21 stands at 6.5%-7% of GDP (as against the budgeted 3.5%).
How about the contributing factors?
In 2007-08, the $110.5-billion reserve build-up amounted to 7.4% of India’s then much-smaller GDP.
Importantly, it was powered largely by foreign investment, external commercial borrowings and other capital inflows totalling $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.
In contrast, the forex reserve accumulation in 2020-21 has been driven mainly by current account balance (exports-imports gap) turning positive at $34.7 billion during April-September 2020.
This surplus has, in turn, been due to imports in April-September 2020 falling by a massive $95.6 billion over April-September 2019.
This is further reflective of low import demand in a shrinking economy.
The current account surplus has also been supplemented by some foreign capital inflows.
For instance, Reliance Industries alone attracted global investments aggregating to about $27 billion in its Jio Platforms between April 22 and November 9 in 2020.
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%, 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.
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.
