WHY ARE FOREX RESERVES RISING DESPITE THE SLOWDOWN IN THE INDIAN ECONOMY?
The major reason for the rose in forex reserves is the rise in investment in foreign portfolio investors (FPI) in Indian stocks and foreign direct investments (FDIs).
Foreign investors (FI) had acquired stakes in several Indian companies in the previous two months. Forex Reserve of India crosses $500 billion mark
While the FDI inflow stood at $4 billion in March, it amounted to $2.1 billion in April. FPI’s have bought stocks worth over $2.75 billion in the first week of June.
Reliance Industries subsidiary, Jio Platforms, has witnessed a series of foreign investments (FI) come to Rs 97,000 crore.
On the other hand, the drop in Global crude oil prices has brought down the Indian oil import bill, saving precious foreign exchange.
Similarly, foreign travels have fallen steeply leading to decline in dollar outflows. Since the cut in corporate tax rates on September 20,
The forex reserves have grown by $73 billion.
HOW THE RISING FOREX RESERVES HELP IN THE SLOWING ECONOMY?
The rising forex reserves give a lot of comfort to the government and the Reserve Bank of India in managing India’s external and internal financial issues at a time when the economic growth is set to agreement in 2020-21.
The foreign exchange reserves (FER) to GDP ratio is around 15%.
It’s a big cushion in the event of any Global crisis on the economic front and enough to cover the import bill of the country for a year.
Reserves will provide a level of confidence to markets that a country can meet its external obligations
WHAT RBI DO WITH THE FOREX RESERVES?
The Reserve Bank (RBI) functions as the custodian and manager of forex reserves, and operates within the overall policy framework agreed upon with the government.
The RBI allocates the dollars for specific purposes.
For example, under the Liberalised Remittances Scheme (LRS), individuals are allowed to remit up to $250,000 financial every year.
The RBI (Reserve bank of India) uses its forex kitty for the orderly movement of the rupee.
It sells the dollar when the rupee weakens and buys the dollar when the rupee reinforce.
WHERE ARE INDIA’S FOREX RESERVES KEPT?
As much as 64% of the foreign currency reserves are held in securities like Treasury bills of foreign countries, mainly the US.
28% is deposited in foreign central banks and 7.4% is also deposited in commercial banks abroad, according to the RBI data.
India also held 653.01 tonnes of gold as of March 2020, with 360.71 tonnes being held overseas in safe custody with the Bank of England (BOE) and the Bank for International Settlements (BIS).
While the remaining gold is held domestically.
COST INVOLVED IN MAINTAINING FOREX RESERVES?
The return on India’s forex reserves kept in foreign central banks and commercial banks is negligible, around 1% or even less.
Several analysts argue for giving greater weightage to return on forex assets than on liquidity. Forex Reserve of India crosses $500 billion mark