Analyse various factors that can influence the vulnerabilities of India’s external sector. (200 Words)
Refer - Business line
Enrich the answer from other sources, if the question demands.
IAS Parliament 3 years
KEY POINTS
· India’s external sector is facing serious challenges. As a net importer of oil and other commodities, India traditionally faces a balance of trade problem whenever oil and commodity prices go up.
· To make it worse, foreign portfolio investors (FPIs) have pulled out a significant amount of money from the Indian capital market over the last six months.
· Though the RBI has managed to control the volatility of the rupee until now, the external sector is facing pressures both in the current and the capital accounts.
· As per RBI data, the cumulative foreign investment inflows during April-February 2021-22 were only $24.6 billion against a much higher $80.1 billion during corresponding year-ago period.
· A combination of these unfavourable economic factors has led to a sharp decline in forex reserves. India has lost around $30 billion worth of forex reserves during the last three months.
· Weekly data of the RBI shows that the country’s total forex reserves have come down from around $633 billion on February 18, to around $604 billion on April 15.
· This opportunity cost is an insurance premium that India has paid to mitigate the threat associated with increased integration with global trade and finance. Possibly the time will soon come to evaluate how adequate this insurance cover is when the going gets really tough.
