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THE JUMP IN FOREX RESERVES MAY NOT BE A POSITIVE SIGN

Focus: GS-III Indian Economy

Why in news?

Amid the covid-19 pandemic, India’s foreign exchange (forex) reserves have been going up at a very fast pace and have touched a new high, in absolute terms, almost every week.

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  • Clearly, there has been a very rapid increase in the country’s foreign exchange reserves since March-end, after the negative economic impact of the coronavirus pandemic was first felt.
  • Some economic and political commentators have tried to pass this increase as evidence of improvement in the overall state of the economy.

What does this jump in forex reserves signify?

  • A large part of the foreign exchange reserves is used to pay for imports.
  • Since imports of goods fell, consequently lesser reserves have been used to pay for imports.
  • This essentially shows a slump in economic activity since the onset of lockdown.
  • India imports a large part of the crude oil that it consumes, and the total oil and petroleum products imports have fallen by 55.9% to $19.6 billion, a clear impact of the lockdown.
  • While imports fell by 46.7% in the first four months, goods exports fell by 30.3%, hence, trade deficit, the difference between imports and exports, fell by 76.5%.
  • The difference in trade was more than made up for through other sources, pushing up the reserves.

What other sources have aided reserves?

  • Besides reduced imports, there are other factors that have pushed forex reserves up.
  • As the price of gold has increased, the value of gold held by the Reserve Bank of India (RBI) has jumped by 21.7%.
  • Over and above this, with people not leaving India for holidays, business trips or education, the demand for foreign exchange while travelling abroad, has taken a beating.

Do foreign investors have any role to play?

  • Foreign institutional investors (FIIs) bring money primarily in dollars. These dollars need to be exchanged for rupees before they can be invested.
  • FIIs have brought in more than $10 billion this year into India and this money has ended up with RBI as foreign exchange reserves.

-Source: Livemint

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October 2022
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