Why India’s forex reserves are rising? 

#GS3 #Economy 

Unlike in 1991, when India had to pledge its gold reserves to stave off a major financial crisis, the country can now depend on its soaring foreign exchange reserves to tackle any crisis on the economic front. 

What are forex reserves? 

  • Forex reserves are external assets in the form gold, SDRs (special drawing rights of the IMF) and foreign currency assets (capital inflows to the capital markets, FDI and external commercial borrowings) accumulated by India and controlled by the Reserve Bank of India. 
  • What is the need of forex reserves? 
  • The International Monetary Fund says official foreign exchange reserves are held in support of a range of objectives like supporting and maintaining confidence in the policies for monetary and exchange range management including the capacity to intervene in support of the national or union currency. 
  • It will also limit external vulnerability by maintaining foreign currency liquidity to absorb shocks during times of crisis or when access to borrowing is curtailed. 

How forex reserves increased in India site slowdown in the economy? 

  • 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. 
  • 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. 
  • On the other hand, the fall in crude oil prices has brought down the oil import bill, saving the precious foreign exchange. Similarly, overseas remittances and foreign travels have fallen steeply – down 61 per cent in April from $12.87 billion. 

How will it help India? 

  • 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. 
  • The rising reserves have also helped 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. 

Where does India keep its forex reserves? 

  • The RBI Act, 1934 provides the overarching legal framework for deployment of reserves in different foreign currency assets and gold within the broad parameters of currencies, instruments, issuers and counter-parties. 
  • As much as 64 per cent of the foreign currency reserves is held in the securities like Treasury bills of foreign countries, mainly the US, 28 per cent is deposited in foreign central banks and 7.4 per cent is also deposited in commercial banks abroad, according to the RBI data. 
  • India also held 653.01 tonnes of gold as of March 2020, with 360.71 tonnes being held overseas in safe custody with the Bank of England and the Bank for International Settlements, while the remaining gold is held domestically. 
  • In value terms (USD), the share of gold in the total foreign exchange reserves increased from about 6.14 per cent as at end-September 2019 to about 6.40 per cent as at end-March 2020. 

Cost involved in maintaining forex reserves  

  • The return on India’s forex reserves kept in foreign central banks and commercial banks is negligible. 
  • While the RBI has not divulged the return on forex investment, analysts say it could be around one per cent, or even less than that, considering the fall in interest rates in the US and Euro zone. 
  • Another issue is the high ratio of volatile flows (portfolio flows and short-term debt) to reserves which is around 80 per cent. This money can exit at a fast pace. 
  • There are some differences among academics on the direct as well as indirect costs and benefits of the level of forex reserves, from the point of view of macro-economic policy, financial stability and fiscal or quasi-fiscal impact, former RBI Governor YV Reddy said in one of his speeches. 

White paper of China 

China has exonerated itself from the global allegations of delay in reporting the COVID19 outbreak, saying the virus was first noticed in Wuhan on December 27 as a viral pneumonia and human-to-human transmission was discovered on January 19, after which it took swift actions to curb it. 

Highlights of white paper  

  • The white paper explains China’s prevention, control and treatment efforts in the battle against the virus, as well as the efforts made at a global level in international cooperation. China has made full use of the weapon to win the battle against COVID-19. 
  • A centralised and efficient command system forms a strong guarantee for China to win the all-out people’s war against COVID-19, the white paper detailing China’s fight against the disease stated. 
  • All local authorities and sectors follow the leadership and instructions of the central authorities, perform their respective duties and cooperate with each other, the white paper noted. 
  • From early outbreak to an all-out nationwide effort to save as many lives as possible, the Chinese Government has taken the most comprehensive, the strictest and the most thorough prevention and control measures to combat the coronavirus outbreak, according to the white paper. 
  • Science and technology have always been the most powerful weapon used by mankind to combat epidemics, and China has made full use of the weapon to win the battle against COVID-19, according to the white paper. 
  • China has vowed to continue advocating globalisation and multilateralism amid the coronavirus pandemic and in its aftermath, said the white paper. 
  • China has released information on COVID-19 in an open and transparent manner as required by law, said the white paper. “It released authoritative and detailed information as early as possible on a regular basis,” stated the white paper, “thus effectively responding to public concern and building public consensus.” 

What’s the issue? 

  • US president Donald Trump and leaders of several countries have accused China of not being transparent in reporting the deadly disease, leading to huge human casualties and economic crisis across the world. 
  • Recently, the World Health Assembly (WHA), the decision-making body of Geneva-based World Health Organisation (WHO), passed a unanimous resolution to probe the origin of the virus. China also backed the resolution. 
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