India’s foreign exchange reserves are reassuring. But vulnerabilities persist
Updated: Jun 17, 2020 09:52 IST
India’s foreign exchange reserves passed the half-trillion dollar mark this month, providing some silver lining to an otherwise overcast economic outlook. India has enough foreign exchange to cover a year’s worth of imports. The deterrent effect this has on speculators is one reason the rupee exchange rate has largely held steady during the lockdown. That the country suffered chronic balance of payments crises from Independence to the early 1990s is now a historical footnote to the latest generation of Indians, but the memory of past weakness remains strong in the government. The Reserve Bank of India was buying dollars when the pandemic began to shore up reserves, an act that now looks excessively cautious. The government should instead be asking how it can leverage its reserve cushion to fulfil the goal of making India a global hub for financial services.
Foreign exchange reserves dipped in March but have been rising the past several weeks. One reason is that outflows are less. Sharp drops in oil and gold imports and outward remittances have meant demand for foreign exchange has been minimal. But the main reason has been a steady flow of foreign exchange into the country despite the lockdown. Foreign direct investment has continued apace. Portfolio investment has returned. There are reasons for discomfort — the collapse of India’s exports and the fact much of the inflow is a consequence of cash-strapped Indian firms selling stakes to overseas buyers. It is nice to bury a ghost of the past, but important not to forget India continues to have many financial vulnerabilities.
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