India Added USD 500 billion Foreign Exchange

India’s foreign exchange reserve has crossed the USD 500 billion mark. This is one upside for the economy. The level of reserves is enough to cover 13 months of imports. India’s reserve is now equivalent to nearly a fifth of the country’s gross domestic product. It’s also the fifth-largest in the world after China, Japan, Switzerland, and Russia. (according to the International Monetary Fund) India’s fiscal outlook has deteriorated tremendously in the first quarter of F.Y. 21. But the ‘liquidity crunch’ can be kept in check now.

Why has the foreign exchange reserve become a strongbox?

India’s trade gap has narrowed to a 13-year low in May. Imports declined faster than exports.

The RBI likely brought about $9 billion in the Forex market in the four weeks ended May 29, pushing up reserves to a record USD 493.5 billion. There was a massive amount of inflow in the local stock market. Also, a huge influx of foreign direct investment in a unit of Reliance Industries Limited is one of the most important factors. Due to lower dollar prices of crude oil, India is expected to save nearly USD 50 billion (INR 3.75 lakh crore) on its import bill. Data from the central bank show India’s external debt rose to USD 558.5 billion as of March 2020 from USD 474.4 billion five years ago. While the level has gone up, the ratio of foreign exchange reserves to overall debt has also risen to 85.5% from 72% in 2015.

Reasons why India is adding foreign exchange reserves

Maybe, India is guarding against a likely downgrade in India’s credit rating. It is also possible that the government wants to be ready for a bigger transfer of surplus to the revenue-starved government.

The current account deficit narrowed. But is this going to last?