Rising Forex Reserves

Subject: Economy

Context:

India’s forex reserve has crossed $500-billion mark recently

Concept:

• RBI was able to increase its reserves by $79 billion over the past year and by $29 billion since the beginning of this fiscal year.
• While the dollar-rupee swap auctions conducted in March and April this year have helped increase reserves to some extent.
• Other unplanned developments behind the increasing reserves are raising external commercial borrowings and an unexpected trade surplus.
• With global central banks pumping in enormous amount of money into the global economy and moving interest rates lower, Indian companies have found it easier to raise funds overseas at cheaper cost.

Concerns:

• Increased overseas borrowing has downsides — corporates can struggle to roll over the loans if the rupee continues depreciating or if the interest rate cycle overseas turns adverse.
• The favourable trade balance is also not something to cheer about as it has been caused mainly by declining demand. Merchandise imports were sharply lower in April and May this year, in line with contraction in global trade.
• Once domestic demand revives with the economy unlocking, demand for petroleum and other products are likely to revive, causing pressure on the trade balance once again