The headquarters of the Reserve Bank of India in Mumbai. According to the RBI’s weekly statistical supplement, India’s foreign exchange reserves rose by over $8.223 billion during the week ended June 5 to cross the $500 billion mark. Image Credit: Bloomberg

Mumbai:India’s foreign exchange reserves rose by over $8.223 billion during the week ended June 5 to cross the $500 billion mark.

According to the RBI’s weekly statistical supplement, the overall forex reserves increased to $501.703 billion from $493.480 billion reported for the week ended May 29.

While the country’s forex reserves jumped by $8.2 billion in the week ended June 5, 2020, since the announcement of lockdown in March, it has surged by $31.8 billion. Hitting an all-time high of $501.7 billion as on June 5, 2020, India has come a long way since its forex reserves of $5.8 billion as of March 1991.

India’s forex reserves comprise foreign currency assets (FCAs), gold reserves, special drawing rights (SDRs) and India’s reserve position with the International Monetary Fund (IMF).

On a weekly basis, FCAs, the largest component of the forex reserves, edged higher by $8.422 billion to $463.630 billion.

However, the value of the country’s gold reserves decreased by $329 million to $32.352 billion.

Besides, the SDR value rose by $10 million to $1.442 billion. The country’s reserve position with the IMF increased by $120 million to $4.278 billion.

Rise in protfolis inflows

The major reason for the rise in forex reserves is the rise in investment in foreign portfolio investors in Indian stocks and foreign direct investments (FDIs). Foreign investors had acquired stakes in several Indian companies in the last two months. According to the data released by RBI, while the FDI inflow stood at $4 billion in March, it amounted to $2.1 billion in April.

After pulling out Rs 60,000 crore each from debt and equity segments in March, Foreign Portfolio Investments (FPIs), who expect a turnaround in the economy later this financial year, have now returned to the Indian markets and bought stocks worth over $2.75 billion in the first week of June. Forex inflows are set to rise further and cross the $500 billion as Reliance Industries subsidiary, Jio Platforms, has witnessed a series of foreign investments totalling Rs 97,000 crore.

Fall in oil prices

Fall in crude oil prices has brought down the oil import bill, saving precious foreign exchange. Similarly, overseas remittances and foreign travels have fallen steeply – down 61 per cent in April from $12.87 billion. The months of May and June are expected to show further decline in dollar outflows.

The rising forex reserves give a lot of comfort to the government and the Reserve Bank of India in managing India’s external and internal financial issues at a time when the economic growth is set to contract by 1.5 per cent in 2020-21. It’s a big cushion in the event of any crisis on the economic front and enough to cover the import bill of the country for a year.

Strength to rupee

The rising reserves is also helping the rupee to strengthen against the dollar. The foreign exchange reserves to GDP ratio is around 15 per cent. Reserves will provide a level of confidence to markets that a country can meet its external obligations, demonstrate the backing of domestic currency by external assets, assist the government in meeting its foreign exchange needs and external debt obligations and maintain a reserve for national disasters or emergencies.