During the last reporting week, the forex reserves have been spotted to be increased by $2.2 billion. The jump is mainly due to the increase in the Foreign Currency Assets (FCAs) which is one of the vital components of the reserves.
This is partially good news considering the fact that the economic situation in India, as of now, is less-than-ideal. The nationwide lockdown has had a considerable impact on the economy of the country, which wasn’t the best in the world even before. This can be largely attributed to the inability of the Indian government to react quickly and efficiently to the growing numbers of the coronavirus infections in the country. The Minister of Finance, Anurag Thakur has come out stating that there is “no COVID-19 impact on Indian economy” on March 18th while the Finance Minister Nirmala Sitharaman has been quoted as saying that this was all the “Act of God” at one of the recent GST council meetings.
Unfortunately, as we have already mentioned, the Indian economy was not the best, to begin with. It has been a serious bottleneck for the global economic forecast for 2020 where it dropped by 5.8 percent. It is worth noting that the IMF did come out blaming the domestic demand for the revision in the growth figure. The credit growth has also been on the two-year low and the construction sector leaves desiring something much more. It is understandable that the nationwide lockdown would have a serious impact on the country’s economy. Some of the strongest economies of the world are struggling to get through like the UK with its high infection rates and even Prime Minister Boris Johnson contracting the virus and fortunately surviving. The US has over 6 million infected and almost 200,000 deceased from the coronavirus but the reality did set in with these governments that were trying to deny or undermine the threat of this pandemic. Thakur’s statement on March 18 just highlights how oblivious the central government of India is about the situation at hand. The Indian economy has shrunk as much as 23.9 percent. This puts it on top of the list of the G-7 summit countries that took the most economic damage with the UK following up close second with its 20.3 percent contraction.
Things are looking up a bit though. The data from Bank of India (RBI) shows that the foreign exchange reserves have risen by $2.296 billion now putting the total number to $537.548 billion in the previous week. This is in quite a huge contrast to what was going on during the previous weeks. To keep things in perspective lets break it down a bit. During the week that ended on August 14th, the reserve has reported a decline of $2.939 billion putting the reserve at $535.252 billion. The week before the foreign exchange market (Forex, FX) kitty has increased by $3.623 billion which is a record number and has put the reserves at $538.191 billion during the first week of August. During the last week, the jump is largely attributed to the Foreign Currency Assets (FSCAs) which rose by $2.618 billion. This has given some of the traders and brokerage firms on the market a breathing space to start the recovery process again. Some of the most reputable Indian forex brokers have already started their efforts to bolster the participation of their registered traders. This has been the focus for the last couple of months already. The market panic has caused a number of traders to either go inactive or just start banking up safe-haven currencies like the United States Dollar. Some have even made a switch to commodities like valuable metals with gold price surging to historic highs during the last couple of months.
Foreign currency assets are expressed in dollars and show the effect of appreciation or depreciation of non-US currencies like the Great British Pound (GBP), Euro (EUR), Japanese Yen (JPY), and others that are being held in the foreign exchange reserves. Although it is worth noting that the gold reserve has been down by $331 million during the last reporting week putting the final number at $37.264 billion. However, there has been a small increase of $2 million in the International Monetary Fund’s (IMF) special drawing rights now sitting at $1.481 billion. This has caused India’s reserve position to also increase with IMF by $6 million now at $4.634 during the reported week.
In conclusion, rising forex reserves is a small consolation to the government and the Reserve Bank of India, which will definitely aid in managing the internal and external financial situations. The importance is even more elevated due to the aforementioned fact that the economic growth has decreased by 5.8 percent during the last 1 year while shrinking by as much as 23% as a whole. The reserves are basically a fail-safe in case of emergencies where the country can try and pay off some of the most necessary obligations if the crisis persists or becomes even more dire. It also provides a certain confidence for foreign investors that the country won’t just up and bankrupt itself, which encourages foreign assets to start flowing into India again.
