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India’s Foreign Exchange Reserves Rises To $353 Billion

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indiaIndia’s foreign exchange (forex) reserves have been steadily increasing during the last 12 months, reaching $353 billion even as other emerging economies witnessed a decline in their reserves. Analysts have however predicted that sustaining this growth would difficult for India this year because of the anticipated fall in foreign fund inflows and remittances from non-residents as well as large outflow on account of maturing FCNR (B) swaps.

India’s central bank, the Reserve Bank of India (RBI) reported in its latest weekly statistical statement that forex reserves on Mar 11 were $353.40 billion, rising $2.54 billion from $350.86 billion reported on March 4, 2016. The value of foreign currency assets was $329.99 billion while gold reserves stood at $19.32 billion.

Forex reserves in India have risen by 6 percent in the past 12 months unlike in other emerging countries where they have been declining due to currency depreciation. The sharpest decline has taken place in China, whose reserves declined by 15.7 percent.

Malaysia’s reserves went down by 13.4 percent while Indonesia saw a drop of 11 percent and Singapore went down by 3 percent.

India has managed this growth despite facing a challenging time in the forex market. The rupee has depreciated by almost 6 percent in 2015-16 and there were outflows to the extent of $15.3 billion in its foreign portfolio. However foreign direct investments witnessed strong growth of 26 percent in the 11 months of FY 2016.

The RBI has made purchases to the extent of $9 billion in its foreign exchange interventions between April 2015 and January 2016. The RBI’s decision to purchase and build its reserves has been attributed to many reasons. FCNR (B) swaps worth $26 billion which were issued to banks to counter rupee volatility in 2013 will be maturing in September and is expected to be redeemed at least partly.

Analysts have pointed out that with the U.S Fed Reserve deciding to hike rates, the risk of outflow in India’s portfolio funds has increased significantly. The reserve has also benefitted from the unexpected fall in crude oil price which could change at any time.

In a statement, Ritesh Jain, CIO, Tata Asset Management said,

The RBI will try to increase the reserves, especially when the rupee appears to be over-valued in REER (Real Effective Exchange Rate) terms.

There are also expectations that with lowering oil prices, remittances from Middle East could reduce which could have a significant impact as almost 50 percent of India’s remittances are from this region. This is another key reason why the RBI is looking to continue to strengthen its reserves.

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