At Over $500 Billion, India's Forex Reserves Now 5th Largest In The World

Amid the coronavirus pandemic, India's accumulation of foreign exchange reserves provides some consolation in a dull economy. The Reserve Bank of India's data shows that the country's forex reserves have surpassed the $500 billion mark for the first time ever. It's also the fifth-largest in the world after China, Japan, Switzerland and Russia.

According to a Bloomberg report citing Anubhuti Sahay, chief India economist at Standard Chartered Plc, the recent surge in reserves was due to a rare current-account surplus situation in the first quarter of the financial year 2020-21 wherein capital flowed into the domestic markets including large foreign direct investments seen into Jio Platforms, the digital arm of Reliance Industries Limited.

How will RBI's forex reserve help the government?

According to the International Monetary Fund, India's forex reserves is now enough to cover 13 months of imports and is equivalent to nearly a fifth of the country's gross domestic product (GDP).

Besides import cover, forex reserves of the country should provide cover for total external debt and short-term debt. Short-term debt is debt maturing within the next one year. "Short-term debt would be around 20% of FX reserves," said an economist at Citigroup Inc in Mumbai to Bloomberg.

RBI's data shows that India's external debt rose to $558.5 billion as of March 2020 from $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 percent from 72 percent in 2015.

"Improvement in economic activity over next few quarters is likely to push the current account back into deficit," said Standard Chartered's Sahay to Bloomberg. "Lower commodity prices and weak global demand are likely to negatively affect remittances inflows and services exports, weighing further on the current account balance."

Further, the level of debt that foreigners are likely to hold, including sovereign bonds, is likely to go up as India works to open its debt market to non-residents.

Generally, India's reserves are mainly driven through its capital account rather than current account surpluses.