Indian Forex Reserves Cross $400 billion for the first time

[ito]

http://www.ndtv.com/business/indias...t-time-5-points-1751087?pfrom=home-topstories

India's foreign exchange reserves crossed the $400 billion mark for the first time ever, strengthening hopes that the country will be able to withstand an expected reduction in stimulus by US central bank later in the year. The country's forex reserves surged by $2.604 billion to reach an all-time high of $400.726 billion in the week ended September 8, 2017, Reserve Bank of India said in a release on Friday. The surge in India's forex reserves is likely to help rupee withstand any volatility that may be seen on exodus of foreign funds from India's debt and equity markets, analysts say. Foreign institutional investors have pumped in more than Rs. 1 lakh crore in to Indian debt and equity market in last 12 months.

Here are 5 things to know about the surge:

1) The surge in India's forex reserves is mainly on account of foreign portfolio flows. High real rates of interest and nearly 6 per cent rise in rupee value against the US dollar has attracted foreign flows in to debt market.

2) However, analysts believe that portfolio flows are likely to come down going ahead. "We expect portfolio inflows to slow in the coming months," Economist Radhika Rao of DBS Bank told Bloomberg.

3) Ms Rao expects current account deficit to double to 1.4 per cent of gross domestic product (GDP) in the year through March 2018. For the quarter ended June 30, 2017, current account deficits rose to $14.3 billion to 2.4 per cent of GDP. In the same quarter last year, current account deficits were $401 million or 0.1 per cent of GDP. The increase in current account deficits was due to larger increase in merchandise imports compared to exports.

4) "It appears the last month's transition to GST had affected some export sectors, but that is expected to normalise going ahead," said A. Prasanna, economist at ICICI Securities Primary Dealership. He said he expected the full year current account deficit to be 1.5 per cent of GDP.

5) The foreign currency assets (FCAs), a major component of the overall reserves, increased by $2.568 billion to $376.209 billion for the week (September 8). FCAs include the effect of appreciation or depreciation of non-US dollar currencies, such as the euro, the pound and the yen held in the reserves. (With agency inputs)

 

[Jugger]

Congratulations!
@ashok321

 

[ashok321]

Congratulations!
@ashok321

Modi inherited 307 billion of FOREX from the previous government.
Not a big jump in 3+ years. Tiny Hong Kong has more Forex Reserves than India, same with tiny Taiwan.

You people are only happy on these things and look the other way when the chips are down elsewhere:

Above is CAD. Now look at the trade deficit picture of last 12 months, India is down by 132 billions. How will Modi bridge this gap?

Oh yes, dirty underwear cant be seen, hence its ok to continue with it.
Overall India is in a financial hole if not in a financial bind.

Moody's rating:

India BBB-
China AA-
Hong Kong AAA

With such rating, India has difficulty in borrowing at lower interest rates.

Go and sway others, by tagging me, you are barking up the wrong tree.
India is still a low income country. Lowest in the G-20 block:

https://twitter.com/x/status/883633763166502912

 

[Laozi]

Jai Ho

 

[Storm Force]

YES INDIA IS POOR

Hundreds if millions starving

poor infrastructure

poor power supply

bureaucracy red tape stopping trade overseas

WHICH MAKES hitting FOREX $400 billion an absolute miracle

I mean look at the powerful super rich Pakistan who has none of these issues with FOREX $16 BILION

 

[salarsikander]

mean look at the powerful super rich Pakistan who has none of these issues with FOREX $16 BILIO

Comparing 400 billion with 16 billion. Truly an Indian will never lose his stupidity even if he is NRI like yourself. Nonsense post as always

 

[Soumitra]

Comparing 400 billion with 16 billion. Truly an Indian will never lose his stupidity even if he is NRI like yourself. Nonsense post as always

 

[Pumba]

wow ! great news.

 

[vishalkamble]

What is the use of this boasting jab ki iska fayda garibo aur farmers tak nahi pohuch paya hai.

http://www.ndtv.com/business/indias...t-time-5-points-1751087?pfrom=home-topstories

India's foreign exchange reserves crossed the $400 billion mark for the first time ever, strengthening hopes that the country will be able to withstand an expected reduction in stimulus by US central bank later in the year. The country's forex reserves surged by $2.604 billion to reach an all-time high of $400.726 billion in the week ended September 8, 2017, Reserve Bank of India said in a release on Friday. The surge in India's forex reserves is likely to help rupee withstand any volatility that may be seen on exodus of foreign funds from India's debt and equity markets, analysts say. Foreign institutional investors have pumped in more than Rs. 1 lakh crore in to Indian debt and equity market in last 12 months.

Here are 5 things to know about the surge:

1) The surge in India's forex reserves is mainly on account of foreign portfolio flows. High real rates of interest and nearly 6 per cent rise in rupee value against the US dollar has attracted foreign flows in to debt market.

2) However, analysts believe that portfolio flows are likely to come down going ahead. "We expect portfolio inflows to slow in the coming months," Economist Radhika Rao of DBS Bank told Bloomberg.

3) Ms Rao expects current account deficit to double to 1.4 per cent of gross domestic product (GDP) in the year through March 2018. For the quarter ended June 30, 2017, current account deficits rose to $14.3 billion to 2.4 per cent of GDP. In the same quarter last year, current account deficits were $401 million or 0.1 per cent of GDP. The increase in current account deficits was due to larger increase in merchandise imports compared to exports.

4) "It appears the last month's transition to GST had affected some export sectors, but that is expected to normalise going ahead," said A. Prasanna, economist at ICICI Securities Primary Dealership. He said he expected the full year current account deficit to be 1.5 per cent of GDP.

5) The foreign currency assets (FCAs), a major component of the overall reserves, increased by $2.568 billion to $376.209 billion for the week (September 8). FCAs include the effect of appreciation or depreciation of non-US dollar currencies, such as the euro, the pound and the yen held in the reserves. (With agency inputs)

 

[salarsikander]

View attachment 425881

Cheap obsession

 

[RISING SUN]

Should India hold $400 billion of forex reserves?
Foreign exchange (forex) reserves with the Reserve Bank of India (RBI) have now crossed the $400-billion mark. This is being celebrated by many people. This column takes a different view.

Suppose a country uses fixed exchange rates. If the demand for foreign exchange is high and the exchange rate cannot be increased to induce a reduction in demand, then the central bank needs to have adequate reserves so that it can supply foreign exchange and meet the excess demand. In contrast, under a flexible exchange rate regime, the price of foreign exchange can adjust to bring about a balance between demand and supply. In this context, foreign exchange reserves are not required under a flexible exchange rate regime.

It is true that under a flexible exchange rate regime, flexibility can give way to considerable volatility in the foreign exchange market. In this case, it helps to have foreign exchange reserves with the central bank. However, this need arises a lot more if the central bank has multiple objectives than in the case where the central bank has adopted inflation targeting. In the latter case, there is less uncertainty for currency markets. The price mechanism works better there and the need for stabilization with forex reserves is less.

The RBI has been using flexible exchange rates since the early 1990s; prior to that it followed a fixed exchange rate regime (which is, in fact, an important reason why there was a balance of payments crisis in 1990-91). Furthermore, it formally adopted inflation targeting in June 2016 (previously the RBI followed multiple indicator approach, which arguably played a role in the events culminating in near-crisis in the currency market in 2013). Given the two important changes in policy regimes, there is no compelling need for the RBI to maintain very large reserves now. This is incidentally true not just of India but most other emerging economies that are similarly placed.

The proposal here to cut down foreign exchange reserves had been put forward earlier by the erstwhile Planning Commission in 2004-05, but it was criticized. The criticism was not always valid. For example, the critique by Arvind Panagariya (now at Columbia University), in his 2008 book, India: The Emerging Giant, was actually about the short-run adjustment process involved in shifting from foreign exchange reserves to investments in infrastructure projects rather than about the issue of optimal level of reserves in the long run. These arguments, missed the woods for the trees. It is worth revisiting the proposal.

Often there is a tendency to keep forex reserves equal to the value of six months of imports. However, foreign exchange reserves, as Kaushik Basu (Cornell University) emphasized, are required to finance only the current account deficits, and not imports as a whole. By this yardstick, the foreign exchange reserves with the RBI are huge. If we take current account deficit at 7.5% of GDP (which is extremely high), then there is a need of about $85 billion of foreign exchange reserves. The actual reserves are $400 billion.

At the end of March, foreign exchange reserves were equal to 78.4% of India’s total external debt. This is a very large proportion. This is particularly true when short-term debt is only 23.8% of the total debt. There are some difficulties with the concepts used but the essential story that foreign exchange reserves are large relative to the flows of hot money (including the portion of equity investments, which is hot money) remains unchanged—more so if other policies are also adopted.

The ministry of finance (MoF) can, according to Anton Korinek at Johns Hopkins University in a series of papers, impose a tax on capital inflows or outflows, if these are sudden and large. Such a tax can discourage large capital flows; the rupee will then neither appreciate nor depreciate too much.

If instead of maintaining large forex reserves, the funds are used to finance, say, useful infrastructure projects, the returns will be much higher. So, the opportunity cost of foreign exchange reserves is very high. In contrast, if the tax policy is used, the revenues will rise for the MoF (and the costs of large forex reserves are not incurred by the RBI). So, the proposed tax policy is superior to the policy of using forex reserves to stabilize the rupee.

There is yet another safeguard available. India can buy an inexpensive credit line from the International Monetary Fund or elsewhere. Such a credit line is an option that gives India the right (but not obligation) to borrow if a crisis situation were to arise in future. This instrument, as this author has shown in several papers, reduces the need for large foreign exchange reserves. India already has a credit line to the tune of $50 billion. Additional credit lines can be bought. So, forex reserves can be much less.

It is true that China’s reserves are much larger than those of India but that is a different story. The yuan had remained undervalued for long, which pushed exports. The large reserves are then a cumulative effect of that policy. However, that story is over and not really replicable now. Also, though China’s reserves were $3.84 trillion in 2014, they have now come down to $3.1 trillion. It appears that they will come down further. Also, $800 billion out of the foreign exchange reserves is China’s sovereign wealth fund.

If the RBI must have large foreign assets (though there is really no need), then it can be divided into two parts. One part can be the standard foreign exchange reserves which are liquid and give a low return (1% or less). The other part can be a sovereign wealth fund, which is relatively illiquid and gives a high return.

Gurbachan Singh is visiting faculty at the Indian Statistical Institute (Delhi Centre) and Ashoka University.

Published with permission from Ideas For India, an economics and policy portal.

Comments are welcome at theirview@livemint.com
http://www.livemint.com/Opinion/loZ...hould-India-hold-400-billion-of-reserves.html

@Nilgiri your views in above news post.

 

[Nilgiri]

Should India hold $400 billion of forex reserves?
Foreign exchange (forex) reserves with the Reserve Bank of India (RBI) have now crossed the $400-billion mark. This is being celebrated by many people. This column takes a different view.

Suppose a country uses fixed exchange rates. If the demand for foreign exchange is high and the exchange rate cannot be increased to induce a reduction in demand, then the central bank needs to have adequate reserves so that it can supply foreign exchange and meet the excess demand. In contrast, under a flexible exchange rate regime, the price of foreign exchange can adjust to bring about a balance between demand and supply. In this context, foreign exchange reserves are not required under a flexible exchange rate regime.

It is true that under a flexible exchange rate regime, flexibility can give way to considerable volatility in the foreign exchange market. In this case, it helps to have foreign exchange reserves with the central bank. However, this need arises a lot more if the central bank has multiple objectives than in the case where the central bank has adopted inflation targeting. In the latter case, there is less uncertainty for currency markets. The price mechanism works better there and the need for stabilization with forex reserves is less.

The RBI has been using flexible exchange rates since the early 1990s; prior to that it followed a fixed exchange rate regime (which is, in fact, an important reason why there was a balance of payments crisis in 1990-91). Furthermore, it formally adopted inflation targeting in June 2016 (previously the RBI followed multiple indicator approach, which arguably played a role in the events culminating in near-crisis in the currency market in 2013). Given the two important changes in policy regimes, there is no compelling need for the RBI to maintain very large reserves now. This is incidentally true not just of India but most other emerging economies that are similarly placed.

The proposal here to cut down foreign exchange reserves had been put forward earlier by the erstwhile Planning Commission in 2004-05, but it was criticized. The criticism was not always valid. For example, the critique by Arvind Panagariya (now at Columbia University), in his 2008 book, India: The Emerging Giant, was actually about the short-run adjustment process involved in shifting from foreign exchange reserves to investments in infrastructure projects rather than about the issue of optimal level of reserves in the long run. These arguments, missed the woods for the trees. It is worth revisiting the proposal.

Often there is a tendency to keep forex reserves equal to the value of six months of imports. However, foreign exchange reserves, as Kaushik Basu (Cornell University) emphasized, are required to finance only the current account deficits, and not imports as a whole. By this yardstick, the foreign exchange reserves with the RBI are huge. If we take current account deficit at 7.5% of GDP (which is extremely high), then there is a need of about $85 billion of foreign exchange reserves. The actual reserves are $400 billion.

At the end of March, foreign exchange reserves were equal to 78.4% of India’s total external debt. This is a very large proportion. This is particularly true when short-term debt is only 23.8% of the total debt. There are some difficulties with the concepts used but the essential story that foreign exchange reserves are large relative to the flows of hot money (including the portion of equity investments, which is hot money) remains unchanged—more so if other policies are also adopted.

The ministry of finance (MoF) can, according to Anton Korinek at Johns Hopkins University in a series of papers, impose a tax on capital inflows or outflows, if these are sudden and large. Such a tax can discourage large capital flows; the rupee will then neither appreciate nor depreciate too much.

If instead of maintaining large forex reserves, the funds are used to finance, say, useful infrastructure projects, the returns will be much higher. So, the opportunity cost of foreign exchange reserves is very high. In contrast, if the tax policy is used, the revenues will rise for the MoF (and the costs of large forex reserves are not incurred by the RBI). So, the proposed tax policy is superior to the policy of using forex reserves to stabilize the rupee.

There is yet another safeguard available. India can buy an inexpensive credit line from the International Monetary Fund or elsewhere. Such a credit line is an option that gives India the right (but not obligation) to borrow if a crisis situation were to arise in future. This instrument, as this author has shown in several papers, reduces the need for large foreign exchange reserves. India already has a credit line to the tune of $50 billion. Additional credit lines can be bought. So, forex reserves can be much less.

It is true that China’s reserves are much larger than those of India but that is a different story. The yuan had remained undervalued for long, which pushed exports. The large reserves are then a cumulative effect of that policy. However, that story is over and not really replicable now. Also, though China’s reserves were $3.84 trillion in 2014, they have now come down to $3.1 trillion. It appears that they will come down further. Also, $800 billion out of the foreign exchange reserves is China’s sovereign wealth fund.

If the RBI must have large foreign assets (though there is really no need), then it can be divided into two parts. One part can be the standard foreign exchange reserves which are liquid and give a low return (1% or less). The other part can be a sovereign wealth fund, which is relatively illiquid and gives a high return.

Gurbachan Singh is visiting faculty at the Indian Statistical Institute (Delhi Centre) and Ashoka University.

Published with permission from Ideas For India, an economics and policy portal.

Comments are welcome at theirview@livemint.com
http://www.livemint.com/Opinion/loZ...hould-India-hold-400-billion-of-reserves.html

@Nilgiri your views in above news post.

Overall I would agree. But I would give maybe a cpl years first for situation to stabilise in India w.r.t exports and foreign capital inflows and how the job creation materialises (and more importantly trends) from further reforms etc. If there are positive markers/mdoels that arise from it in some scaled fashion (I doubt we are going to become some export tiger given nature of how world economy is changing these days) then we need to leverage those as much as much as we can and then figure out how much buffer is left to deleverage and release the stockpiled liquidity into other avenues (described in article).

But yes if we are going/staying more consumption route growth long term, having massive forex is not needed and can be counterproductive in opportunity cost for sure. But we must of course hedge as best as we can, that will only resolve once the current demonetisation + GST + further reforms (say tax, SEZ and labour) resolve much more....it is still too foggy right now.

@anant_s

 

[anant_s]

demonetisation + GST

Wait for another 6-9 months before we start seeing clarity and end of chaos from these steps.
Right now what we are seeing is a pre-stabilization period and as a result a lot of things seem to be in bad shape.
Rural economy and health of banks too is a matter of concern and recent corrective steps by government are likely to take time.
In this scenario country's Forex reserve might be a sign of solidity but let us wait for other macro-economic factors to become consistently stable for 2-3 quarters before celebrations.
But i'm with PM, when he recently said, that what we are seeing on economic front is a temporary blip.

At the end of March, foreign exchange reserves were equal to 78.4% of India’s total external debt. This is a very large proportion. This is particularly true when short-term debt is only 23.8% of the total debt.

Our debt servicing position is extremely comfortable. Further with India negotiating energy import prices on LNG, we are likely to improve our FOREX reserves even further this year.

 

[RISING SUN]

Wait for another 6-9 months before we start seeing clarity and end of chaos from these steps.
Right now what we are seeing is a pre-stabilization period and as a result a lot of things seem to be in bad shape.
Rural economy and health of banks too is a matter of concern and recent corrective steps by government are likely to take time.
In this scenario country's Forex reserve might be a sign of solidity but let us wait for other macro-economic factors to become consistently stable for 2-3 quarters before celebrations.
But i'm with PM, when he recently said, that what we are seeing on economic front is a temporary blip.


Our debt servicing position is extremely comfortable. Further with India negotiating energy import prices on LNG, we are likely to improve our FOREX reserves even further this year.

Sir, I don't believe waiting will help as this government is hell bent on bringing reforms even at the cost of their popularity, so we can't be sure that they will not bring some big reforms again in near future. Thank you.

 

[anant_s]

bringing reforms

Thats not a problem if government carries out structural reforms, trouble is with populist steps (like Farm loan waivers) and as RBI warned yesterday with trying to provide a stimulus package. As last decade has shown unless government spending brings in proportionate growth or growth opportunities, stimulus packages almost always backfire in form of mounting debts.