Forex reserves surge $64 bn in 2019 to $457 bn; rising crude prices a concern
The Indian Express
January 05, 2020
Fuelled by strong foreign direct investment, foreign portfolio investment and relatively stable global crude oil prices in calendar year 2019, foreign exchange reserves in the country shot up by 16.3 per cent, or $64 billion, to close the year at $457.46 billion. However, a sudden spike in global crude oil prices on Friday, following the growing geopolitical tension between the US and Iran, poses a potential threat in the near term to Indian currency, inflow of funds to India and India’s import bill.
According to the weekly data released by the Reserve Bank of India, the forex reserves rose by $2.56 billion in the week ended December 27, 2019. The reserves have grown sharply over the last three months and it has grown week after week over the last 14 weeks, adding $28.9 billion since September 20 when the foreign exchange reserves stood at $428.57 billion.
On September 20, the Finance Minister announced a cut in the corporate tax rate, a move that was termed as one that would propel investments into the Indian economy.
While FPIs invested a net of $19.4 billion into the Indian capital markets, the FDI equity inflows in the first nine months of calendar year 2019 amounted to $36.97 billion.
This continued inflow of funds by foreign investors despite a slowdown in economic growth has fuelled the rise in forex reserves.
In the reporting week ended December 27, the rise in reserves was mainly on account of an increase in foreign currency assets, a major component of the overall reserves, which surged by $2.2 billion to $424.936 billion. During the week, gold reserves also increased by $260 million to $27.39 billion.
While investor sentiment turned weak after the Budget announcement in July to impose higher surcharge, market participants say the government’s decision to reverse its Budget decision relating to higher surcharge impact on FPIs, along with a cut in the corporate tax rate in September, played a significant role in turning investors’ mood and drawing them to invest in the Indian economy and markets.
Between September and December, FPIs invested a net of Rs 48,510 crore (over $6.8 billion) into Indian equity and debt market. By contrast, they pulled out a net of Rs 8,874 crore between July and August 2019 (aggregate of debt and equity markets).
While stability in global crude oil prices has played an important role in keeping India’s import bill under check, an expected rise in global crude oil price on account of the US and Iran tension may just hamper the continuing inflow of foreign funds into Indian markets and may also increase India’s import bill thereby hurting the continued rise in foreign exchange reserve.
However, the rise in foreign exchange reserves over the last three months has come as a breather for the country’s rising external debt, which rose significantly over the last couple of years from $485 billion in June 2017 to $557 billion in June 2019. Experts say if external debts are higher than the forex reserves, it makes the economy vulnerable to any oil price shocks. So, the spike in crude oil price and an expected rise in price further may hurt the Indian economy and its potential to attract foreign investment.
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