Forex reserves are assets in the form of gold, special drawing rights (SDRs), foreign currency assets (FCA) and reserve positions in the IMF, which are held by the nation's central bank.
As India becomes the 5th largest foreign exchange reserves holder in the world, with forex reserves topping $500 billion for the first time ever for the week ended 5 June 2020, the Indian rupee may head north from here with the current capital outflows turning into inflows. “As I have been saying in recent weeks, demand suppression (such as lockdown) would push the INR to appreciate after an initial capital outflow,” Sanjeev Sanyal, Principal Economic Advisor to the Ministry of Finance, said in a tweet.
The Reserve Bank of India bought billions of dollars to stem rupee appreciation, but the situation would soon turn around. “Now, as we open the economy to remove demand suppression, and push up credit growth, we will both revive imports and foreign capital inflows,” Sanjeev Sanyal said. Over $2 billion in FDI, FII and corporate inflows in the first week of June already drove Indian rupee near 75-mark against the US dollar.
Twin management: Value of rupee and Forex pile
A massive surge of $8.2 billion in foreign currency assets (FCA), which is a major component of the overall reserves, took India’s forex reserves at a record high level of $501.7 billion as on June 5, 2020, according to the latest RBI data. RBI bought about $8 billion worth forex reserves. “RBI’s dollar-buying intervention in significant quantum fulfills its twin objective of not allowing the pair to get strengthened past 75.00 mark in order to support the country’s sagging exports as well as a strong forex kitty allows the bank to intervene in the market to cap any slide in rupee devaluations in offshore and onshore,” Amit Pabari, managing director, CR Forex Advisors, told Financial Express Online.
How India got past $500 billion in forex reserves this week
Forex reserves are assets in the form of gold, special drawing rights (SDRs), foreign currency assets (FCA) and reserve positions in the IMF, which are held by the nation’s central bank or monetary authority. During the reporting week, reserves held in gold declined by $329 million and stood at $32.352 billion. Similarly, special drawing rights of the IMF (SDRs) fell by $10 million to $1.4 billion and the central bank’s reserve position in the IMF stood at $4.2 billion, with a fall of $120 million during the period.
From one crisis to another, a shift in the warchest
The surge in India’s foreign exchange reserves means that during any financial crisis, India had to pledge its gold reserves to tide over the crisis, but now the country can depend on its forex reserves, as explained in a column in The Indian Express today. India’s forex reserves have risen from the abysmally low levels of $5.8 billion in March 1991. “RBI has likely prevented any sharp depreciation in the currency yesterday by booking profit on the dollars bought at lower levels. Therefore, it is likely that rupee will trade in the range of 75.00-76.20 levels due to RBI’s intervention on both the sides,” Amit Pabari of CR Forex Advisors said.