The foreign exchange reserves scaled up to an all-time high level for the 14th consecutive week at $455 billion as on December 20, 2019. The reserves are $43 billion higher than $412 billion as on March 2019. "Despite global economic uncertainty coupled with weakness in the domestic economic demand, foreign exchange reserves scaling an all-time high indicates (to an extent) the external sector stability of the economy," said a report by CARE Ratings.
Components of total forex reserves include foreign currency assets, gold, reserves tranche position and special drawing rights (SDRs); 93 per cent of total foreign reserves are held as foreign current assets in major currencies followed by 6 per cent in the form of gold.
While total forex reserves jumped from $412 billion as of March-end 2019 to $455 billion as of 20 December, 2019; foreign current assets increased to $422 billion, 10 per cent higher than the start of the fiscal. Gold assets rose from $23.4 billion to $27 billion during the said period.
On a cumulative basis, forex reserves have risen by $43 billion until 20 December, 2019 compared to a fall of $12.5 billion during FY19. It had risen by $54.4 billion in FY18. The significant increase in the reserves against a decline during the previous fiscal is attributed largely to higher FPI inflows, moderation in trade deficit and higher foreign direct investment (FDI), adds the report.
FPI inflows during the period has been $10.7 billion compared to outflows of $14.6 billion for the entire FY19. In FY20, April-May and October-November recorded significantly higher FPI inflows of more than $2 billion. The rollback of certain taxation measures (after the same were announced in the Budget in July, 2019) along with government measures to reinvigorate the demand in the economy has led to higher FPI inflows during this fiscal. "In addition, consequent to the resumption of ultra-low interest rate policies by global central banks (namely US Federal Reserve and ECB) and relatively higher interest rates in India have led to higher FPI inflows," the report highlighted.
Trade deficit has seen moderation from $134 billion during April-November, 2018 to $111 billion during the same period in the current fiscal year. The consecutive six months of contraction in total imports between June and November 2019, largely owing to benign crude oil prices, has supported the moderation in trade deficit. Net foreign direct investment was also higher during April-October at $23.4 billion against $20.1 billion last year.
There has been a sustained increase in the forex reserves from August 2019 to December 20, 2019. On an average, rupee has remained in the range of 71-71.3 per dollar during the same period. The rupee should have ideally appreciated but did not as the RBI was buying forex in the market.
The announcements in the forthcoming Budget could play an important factor in FPI inflows, which in turn could have a bearing on the forex reserves. On the other hand, rising crude oil prices can change the direction of imports, the report added.