Forex reserves shine amidst the gloom (Indian economy's external sector)

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 Forex reserves shine amidst the gloom (Indian economy's external sector)

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• One bright spot: Despite all alarms ringing out loud on the economy, foreign exchange reserves of India are growing constantly. They are at $447 billion now. That is enough for 8.7 months of imports.
• Rupee comfortable: The RBI has enough dollars to protect the rupee, in the forex market. In August 2019, RBI sold $10 b to stop the INR falling below 73 to the dollar.
• Two factors behind high reserves:

1. The Balance of Trade (BoT) is under control for a year, with trade balance of October 2019 at 40% lower level than that in 2018. Low oil prices ($50-60 per barrel) helped. Slow global growth also pulled the trade deficit down.
2. Capital accounts inflows are very strong. FDI from April to June 2019 was up 28% (y-o-y). Despite the trade war and Brexit, investors have come to India.

• Change in FPI: In 2018-19, FPI outflows were Rs.38930 crore, while in FY20 so far, equity FPI inflows were Rs.34354 cr and debt FPI was Rs.31490 cr. Why are foreigners coming? Relatively higher returns on debt, and stable rupee.  (so RBI can cut rates a bit more)
• Inward remittances from NRIs: This part of capital account was bad - 26% lower in April-Sept 2019 y-o-y. Middle East stress played its part. Overall, India is no. 1 in inward remittances, globally.
• USD-INR swap auctions: The RBI conducted two auctions of five bllion dollars each, of 3 yrs tenor, in March and April 2019. That pushed durable liquidity in Indian economy, and boosted forex by $10 billion.
• Market interventions: RBI has purchased $22 billion, as part of market interventon in 2019. That has kept the rupee from appreciating sharply.
• ECBs growing fast: The sharp growth in external commercial borrowings is due to RBI and GoI asking Corporates to tap global markets for dollars, given low rates and tight liquidity in India. That has pushed short-term trade credit up.
• Debt-service ratio: It measures export earnings against interest and principal repayments. It is at 5.8 now, down from 8.8 in 2016. So no scope of reducing forex reserves for now.
• What next: Keep wooing foreign investments, improve upon the ease of doing business, avoid policy flip-flops etc. 
• Summary : India's foreign exchange reserves are at a record high, giving the RBI the needed space to manage the rupee's value properly.

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