Rise in Foreign Exchange Reserve, March 2019

Why in news?

India's foreign exchange reserves rose to a ten-month high of $411.91 billion as of March, 2019.

How has the forex reserves been?

Forex reserves had hit a high of $426 billion in the week ended April 13, 2018.
But it witnessed a steady slide over the following months and went down to $392 billion in the week ended October 26.
This was on account of the RBI intervention to manage the rupee.
In October 2018, the rupee had fallen to its all time low of 74.34 against the US dollar.
The rupee instability was, in turn, due to sharp rise in crude oil prices and resultant pressure on India’s current account deficit.
Capital outflows by foreign institutional investors from debt and equity markets was also a major reason.

What are the recent developments?

Forex reserves are now the highest since $413 billion recorded in the week ended June 8, 2018.
The inflow of foreign capital into India’s stock market in March, 2019 hit a high of $4.89 billion.
This was the biggest foreign inflow into Indian stocks since February 2012.
As a result, the stock market rose a solid 8% this March.
Foreign investment in Indian equities stood at $2.42 billion in February, and is expected to be strong in April as well.
The record foreign portfolio investment (FPI) inflows significantly added to the forex kitty.

What are the other driving factors?

Both cyclical and structural factors are behind this sudden uptick in foreign investment.
There is a fall in crude oil prices in recent months and appreciation of the Indian rupee vis-a-vis the dollar.
The appreciating rupee helps boost returns in dollar terms for foreign investors pumping money in Indian markets.
A rupee-dollar swap by the RBI last month also added to the forex reserves.
[The amount of dollars raised through these operations will reflect in the RBI's foreign exchange reserves for the tenor of the swap.]
Besides, India has emerged as the fastest-growing major economy when Chinese economy has been slowing down in the last one year.
So investors expect India to be a major source of global growth in the coming years and thus a favourable investment destination.
Also, there are clear signs that western central banks have relaxed the interest rates.
E.g. the Federal Reserve and the European Central Bank have promised to keep interest rates low for longer
This has caused investors to turn towards relatively high-yielding emerging market debt as in India.

What lies ahead?

The return of foreign capital is certainly a good sign for the Indian economy.
Evidently, the rupee has appreciated by about 7% since early October when it was moving around 74 against the dollar.
But policymakers need to be careful as other emerging Asian economies will be competing hard to attract foreign capital.
In this context, macroeconomic management is key to India to retain its image as an investment destination.
The high fiscal deficit of both the Centre and the State governments need to be addressed as well.
Long-pending reforms to the labour and land markets are the most pressing changes that will affect India’s long-term growth.
So to retain the investor confidence, it is essential to increase the pace of these structural reforms too.

Source: The Indian Express, The Hindu

Author: Shankar IAS Coaching Center Coimbatore