MUMBAI | KOLKATA: Four years after a currency crisis singed Indian financial assets, the country’s foreign exchange reserves have surged to a record $400 billion, up 45% from the trough, bolstering the hope that there’s enough cushion to face any headwinds originating in global markets.
India now ranks eighth in foreign exchange reserves in a list that’s headed by China ($3.09 trillion) and Japan ($1.2 trillion).
The record amount of reserves accumulated, mainly through the flow of funds from portfolio investors and foreign direct investment in manufacturing as well as services, reflects the strength of India’s macro economy and investor faith in growth.
But the swelling dollar corpus has meant a stronger rupee, hurting exports amid rising imports, thus posing a currency management challenge for the Reserve Bank of India (RBI).
The current account deficit (CAD) widened to 2.4% of gross domestic product in the June quarter, up from 0.1% in the year-ago period, the central bank said. To be sure, a recovery in global demand helped India’s exports rebound in August after slowing in July, the government said on Friday in a separate data release. But imports outpaced exports and grew 21%, widening the trade deficit to $11.6 billion from $7.7 billion in the year-ago period.
“Record high foreign reserves, mainly borne out of strong portfolio inflows, reinforce investors’ positive view on the economy, beyond the attraction of higher yields and a stable currency,” said Radhika Rao, economist at DBS Bank in Singapore. “With the central bank intervening heavily in the forwards space, the reserves stock is bound to climb further as those swaps mature.” Foreign exchange reserves stood at $400.73 billion for the week ended September 8, RBI said on Friday. Of this, about 6% was contributed by currency movements with the dollar depreciating across a range of currencies.
India was among those at the receiving end of global financial turmoil in 2013 when then US Federal Reserve chairman Ben Bernanke roiled the markets with comments on the possible tapering of the quantitative easing that began after the 2008 global financial crisis.
Rupee Appreciation Affects Trade
The rupee plummeted to a record 68.85 against the dollar and reserves slumped to a low of $275 billion, prompting the government and central bank to embark on a series of crisis-management measures. Among these was a special threeyear deposit scheme for non-resident Indians (NRIs) with a hedge facility that brought in about $27 billion, which helped stabilise the currency.
Since then, the focus on inflation containment at 4% (with a 2 percentage point band on either side), restricting the fiscal deficit and macroeconomic reforms have helped soothe investor nerves.
Foreign portfolio investments have been strong with equity investments at Rs 42,659 crore in 2017 and Rs 1.32 lakh crore going into debt. This has resulted in the rupee strengthening 6% this year, making it the best performer among major emerging economies. It should be noted that the rupee slumped to 68.86 in November 2016 before recovering. It closed at 64.09 to the dollar on Friday.
The currency appreciation is making imports more attractive while exports are becoming uncompetitive. The latest RBI data shows that the current account deficit, the excess of imports over exports, was at $14.3 billion in the June quarter, up from $0.4 billion a year earlier, and $3.4 billion in the March quarter.
“The widening of the CAD on a year-on-year basis was primarily on account of a higher trade deficit of $41.2 billion brought about by a larger increase in merchandise imports relative to exports,” RBI said in a statement.
“The sharp surge in the current account deficit comes as no surprise, with the spike in gold imports prior to the introduction of GST (goods and services tax) responsible for half of this uptick,” said Aditi Nayar, economist at ICRA, the Indian unit of Moody’s. “With the size of the current account deficit in Q1 nearly as high as the FY2017 level of $15 billion, the FY2018 deficit may double to around $30-32 bil ..
Source: economictimes.indiatimes.com