Foreign Reserves and National Priorities By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

March 24, 2016 | Posted by bobbysrinivasan << back to blog

Countries which do not have adequate foreign reserves to meet their import payments often either need to curb the imports or borrow money overseas in US dollars to build the foreign reserves. Generally foreign money will flow into a country either to buy into the local stock and bond market or as Non-residents sending their money to keep their savings; or companies independently borrowing which often is referred as external commercial borrowing, or finally as Foreign Direct Investment to engage in manufacturing and service activities. These are besides net merchandize imports of goods and services.

When a country faces currency exchange crisis the value of their currency often becomes a target for massive correction either through devaluation (by the Central Bank of the country) or through non-deliverable forward contracts (by the traders who sell the currency big time against the dollar). Recently Argentina, Venezuela, Russia, Brazil have seen their currencies depreciate heavily against the dollar.

Lucky for India, we are enjoying a stream of foreign currency inflows even though it is erratic. Here is the table of inflows,

Source	In billions
Source	2012-13	2013-14	2014-15	2015-16
Net FDI (April – Jan)	19.8	21.6	31.3	31.7
Net FDI (April – March)	26.9	4.8	40.9	-15.3
Net NRI Deposit (April – Jan)	14.8	38.4	14	12.7

Source: RBI.

While Indian Forex reserves on the surface looks good there are many issues relating to it.

The FII money which is nearly 250 billion or so cannot be deemed to be permanent. It can leave any time causing concern.
The FCNR (B) swaps issued in 2013 and due in Sept 2016 is worth US $ 26 billion. RBI may provide renewal of them perhaps not on old terms. But there is a possibility that a part of it may go back to where it came from.
The US interest rates are threatening to go up. In the last ten years huge amounts of money have come from them into our bond and stock market. There is always the risk that this may leave the country atleast partially to take advantage of opportunities in other emerging markets.
Of course India will be constantly on the lookout for attracting additional dollars to keep the rupee stable.

The following table will provide the Forex reserves of countries excluding gold.

	Latest available	1 year ago	% of change
World	10889 billion	11652 billion	-6.55%
China	3202 billion	3801 billion	-15.76%
Malaysia	91.7 billion	106 billion	-13.49%
Mexico	167 billion	189 billion	-11.64%
Indonesia	96 billion	108 billion	-11.11%
India	330 billion	3.12 billion	+5.77%
Singapore	246 billion	254 billion	-3.15%
Russia	310 billion	315 billion	-1.59%
Brazil	349 billion	363 billion	-1.13%
South Korea	358 billion	353 billion	1.42%

Source: Bloomberg.

The main reason why India’s reserves are not falling is because of the stability of the government and its projected economic growth. Kudos to our government for the financial efficiency and commitment to clean up the NPA of our banks.

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