Our record forex reserves must be seen in the right perspective

Synopsis: India’s Foreign exchange reserves have registered a record increase. However, analyzing factors and impacts of this increase are important.  

Introduction  

India’s foreign exchange reserves crossed $600 billion for the first time. On July 11, the reserve stood at $608.1 billion. Out of that foreign currency reserves account for $563.5 billion and gold reserves accounts for $38.1 billion. 

Now India has 5th largest foreign exchange reserves in the world. Whereas Gold reserves 695.3 tonnes are largest.  

How useful is this increase in foreign exchange reserves? 

Cover for imports: Firstly, if we consider the projected imports for 2021-22, the current level of reserves provides cover for less than 15 months. It is lower than for other major reserve holders—Switzerland (39 months); Japan (22 months); Russia (20 months); and China (16 months).  

External debt: Secondly, as of December 2020, total external debt of India is $563.5 billion. It was 104% of our foreign currency assets of $541.6 billion on 1 January 2021.  

Net International Investment (NII): Between December 2019 and 2020, NII position of India has improved. Foreign exchange reserves get counted as assets in counting net international investment position. 

NII is the difference between a country’s stock of foreign assets vis-a-vis foreigners’ stock of the country’s asset.  

Reasons behind an increase in foreign exchange reserves 

Due to fall in consumer demand for oil and other products, imports of India reduced. Other activities like personal and business foreign travel, foreign education, etc. where foreign exchange is required also came down. 

India’s incoming foreign currency pace from exports and remittances also reduced. However, it was still higher than the demand for it.   

Foreign Portfolio Investments to India was at all-time high of $37 billion.  

Suggestions  

Covid has impacted the private consumption badly. Thus, this increased foreign exchange reserves should be spent to give a stimulus to the economy. 

Source: – Livemint