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India’s foreign exchange reserves 5th largest in world 

India’s foreign exchange reserves are equivalent to almost one fifth of the country’s gross domestic product.

Jul 3, 2020 13:53 IST
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India’s foreign exchange reserves, which currently stand at more than USD 500 billion, are the fifth largest in the world after China, Japan, Switzerland and Russia, as per the International Monetary Fund. 

India’s foreign exchange reserves are equivalent to almost one fifth of the country’s gross domestic product. They are considered to be enough to cover 13 months of imports.

This is extremely significant for the nation, especially in the wake of Coronavirus pandemic, which had a major impact on the Indian economy along with the world. India is still in the process of reopening its economy after more than two months of strict lockdown. 

How are India’s foreign exchange reserves so high?

India’s foreign exchange reserves have received a huge boost due to a rare current-account surplus in the first quarter, return of inflows into the local stock market and foreign direct investment, including major investments in Reliance Jio platforms during these past two months. Reliance Industries is India’s largest company by revenue and investments in its Jio Platforms helped the Reserve Bank of India to accumulate a total of USD 25 billion in foreign exchange in the quarter through June.

Why is this important?

Having high foreign exchange reserves will serve as a cushion against market volatility. It will provide added comfort to the foreign investors and credit rating companies that the government can meet its debt obligations despite a dismal economic outlook. 

What are foreign exchange reserves?

•  Foreign exchange reserves are cash and other assets held by a central bank of a nation. The Foreign exchange reserves can comprise bonds, banknotes, deposits, treasury bills and other government securities of the reserve currency. Some nations hold a part of their reserves in gold, and special drawing rights are also considered reserve assets. 

•  The forex reserves are primarily available to balance payments of the country, influence the foreign exchange rate of the nation’s currency and maintain confidence in financial markets. 

•  The foreign exchange reserves are held in one or more reserve currencies, currently mostly in US dollar and to a lesser extent the Euro.

•  Often the cash or securities are retained by the central bank and the "holdings" of the foreign country are identified to belong to the other country without actually moving them from the vault of that central bank. They may, however, from time to time be physically moved to the home or other country.

•  Currently, interest is not paid on foreign cash reserves, nor on gold holdings, but the central bank usually earns interest on the government securities.

Background

India’s trade gap came down to a 13-year low in May, as imports declined faster than exports amid strict lockdown imposed to contain COVID-19 outbreak. However, as an emerging market economy, India needs to import capital goods and machinery to keep its industrial sector humming. The cheaper oil also helped lower the import bill.

India’s current account is likely to remain in surplus in the April-June period, but a recovery in imports might tilt the balance for the full year. As per experts, the improvement in economic activity over the next few quarters is likely to push the current account back into deficit.

After outflows in March, foreign investment into Indian stocks has picked up in the past two months. Inflows have also increased with the sale of stakes in companies like Reliance Jio and Kotak Mahindra Bank Ltd. The net FDI flows made up 51.7 percent of the total capital flows in the financial year that ended on March 31.
A similar trend is expected in Financial Year 2020-21 as well with net FDI flows likely to account for nearly 65 percent of the total capital inflows.

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