Rajya Sabha TV Big Picture: India's Forex Reserves & Economy
Context: India's Foreign Reserves crossed the 500 USD mark for the first time after a surge of 8.22 USD in a week ending June 5, 2020 aided by higher foreign inflows.
About Forex Reserves of India:
- These are holdings of bank deposits, cash, bonds, and other financial assets which are denominated in currencies other than the Indian rupee.
- Reserve Bank of India manages the Forex reserves for the Indian government.
- For long the central Target of keeping reserves has been generally to cover the minimum of 3 months import bills.
- They facilitate Foreign trade, act as a cushion against the volatility of Rupees and also in case of a slowdown.
Composition of India's Forex Reserve:
- Foreign Currency Assets
- Special Drawing Rights (SDRs)
- Reserve Position in IMF
Reasons for the rise in Forex reserves:
- Spurt in Investment (FDI)
- Spurt in investment in foreign portfolio investors in Indian stocks as well as in foreign direct investments (FDIs).
- Many Indian firms have been acquired by Foreign Investors in recent times.
- The rise in Foreign institutional investors (FIIs) in the hope of improving the Indian economy which had earlier pulled huge investment out of the Indian economy in March 2020.
- Lower oil prices in the past few months because of Oil politics especially between Russia and USA and also global economic slowdown led to a decrease in demand and so the prices. India is heavily dependent on import of oil has benefitted hugely in terms of saving huge foreign reserves.
- Also because of Nationwide lockdown, the demand for Oil has also reduced so lesser need for imports.
- Imports bill has gone down substantially in the past few months for the raw materials, intermediary goods in various sectors and also the import of gold has seen a slump.
- Overseas remittances and foreign travels have also gone down resulting in lesser outgoing of foreign currency from India.
Significance of Higher Forex Reserves:
- Stability to our financial system in the international market.
- Greater confidence to all stakeholders on the Indian market.
- Assist the government in meeting its foreign exchange needs and external debt obligations
- Insulation from external shocks like high oil prices, trade obstructions etc
- Reserves are enough to cover the import bills for a year giving more flexibility to Government in taking more risk investment in the strategic arena.
- Strengthening of the rupees against the dollar.
What does RBI do with the forex reserves:
- The RBI acts as the custodian and manages the forex reserves and its operations are within the policy framework that is agreed upon with the government.
- RBI allocates dollars for specific purposes like under Liberalised Remittances Scheme, a person is allowed to remit up to 250,000 USD every year.
- It sells Dollars when Indian Rupees gets weakened and buys when Rupees strengthen.
- Oil prices will go up as the global economy improves and the consensus is built between oil-importing nations.
- Our exports are uncertain on how it will behave in future as other market emerges from the COVID-19 Pandemic.
- Inward Remittances will also be going to get further hit and an estimates 25% of reduction from the previous amount.
- Foreign investment especially FII are very volatile and depends highly on the market status so more focus on the FDI is to be there.
- Increase in Capital account liberalisation to allow private companies to invest more in other countries so as to make more beneficial use of Forex reserves.
- Composition of an expert committee to look after the prospect of utilising the increased Forex reserve in an effective manner.
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