Rbi forex reserves data

In April and May last year, there was almost total closure of transport and industrial activities. Even after lockdown relaxations, the economy has not resumed its normal functioning. Moreover, the international price of crude oil has also slumped in the wake of the pandemic. Similarly, the import of many electronics products mobile phones, laptops, notebooks, tablets, smartwatches, earphones etc.

The drop in imports is also attributable to the import substitution policy of the government under Aatmanirbar Bharat Abhiyan Self-reliant India Initiative. In the capital account too, non-debt inflows in the form of foreign investments, both direct and portfolio, have increased, leading to accretion in foreign exchange reserves.

Foreign investors, including Google and Facebook, have acquired stakes in several Indian companies recently. Foreign exchange reserves act as a cushion against rupee volatility which can be caused due to many reasons, including variations in interest rates in the US and other developed countries. RBI intervenes to stabilize the rupee against the dollar whenever there is excessive volatility in the exchange rate.

It sells dollars in the foreign exchange market whenever rupee weakens and buys dollars when it strengthens. The exchange rate moves within a band as per the current policy of the RBI in this regard. Thus, from the point of view of the RBI, the level of reserves is intricately linked with the exchange rate management. Hefty reserves guarantee timely payment for repatriation of profits and portfolio outflows, both crucial to attract direct and portfolio foreign investments. Similarly, adequate foreign exchange reserves enhance the confidence of domestic investors and the general public by demonstrating that national currency is backed by external assets.

Moreover, foreign currency reserves act as the first line of defence to address unanticipated contingencies that can occur suddenly war or natural calamity. They are held in the national interest to meet any unpredictable demand for foreign currency and serve as a means of crisis prevention. The direct financial cost of holding reserves is the difference between interest paid on external debt and returns on external assets in reserves.

This low rate needs to be compared with the rate of interest which the country pays on its external borrowings.

Foreign Exchange Reserves by Country Comparison

In this context, it is relevant to talk of the adequacy of reserves. Though tests of adequacy are country-specific yet economists have prescribed certain general guidelines in this regard. Among the various tests of the adequacy of reserves, the following are more important: a size of the economy, b import cover, c exchange rate policy floating or fixed exchange rate , d current and capital account openness and e stability of domestic financial markets.

Among the various tests of adequacy, import cover, which is readily measurable, is the most widely-used criterion. It refers to the number of months of imports that can be covered with foreign exchange reserves available with the central bank of a country RBI in the case of India. Rangarajan , , had recommended that the target for foreign exchange reserves be fixed in such a way that they are generally in a position to accommodate imports of 3 months. Tarapore , suggested an import cover of 6 months. According to the same report December 8, , it further increased to From the above one can infer that current level of reserves is more than adequate as per the import cover criterion.

In other words, the level of reserves is in the high comfort zone. The question is how to use the excessive surplus, i. One option can be to invest excessive surplus in low liquidity but safe and high-yield instruments so that RBI earns more for the country.

Attaching more weight to returns on foreign exchange assets than on liquidity will reduce net cost of holding reserves. It can be argued that RBI is not a commercial entity and hence it is not supposed to earn profits. Its main task is to ensure that the reserves are invested in safe and liquid assets. Therefore, the deployment of reserves is done in sovereign bonds of financially strong countries and institutions. Though not a commercial entity, one cannot overlook the fact that RBI has become a significant part of the finances of Central Government in the sense that its surpluses are annually transferred to the Centre which supplement the non-tax revenue of the Central Government budget.

With the central bank expected to keep the rupee stable, its dollar purchases could well continue in case the momentum of inflows sustains.

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