With $605 billion, India ties with Russia as the fourth largest foreign exchange reserve holder
India’s forex reserves crossed $600 for the first time. On 4 June, foreign exchange reserves stood at $605 billion, roughly tied with Russia as the world’s fourth-largest reserve holder.
While India’s foreign exchange reserves stood at $605.008 billion, Russia’s stood at $605.2 billion.
It took nearly a year for the reserves to grow to $100 billion, which has generally been the pace of accumulation since Shaktikanta Das became governor of the Reserve Bank of India (RBI) in November 2017.
The vast accumulation of reserves has also significantly improved India’s import cover. At the end of December 2020, the foreign exchange reserve cover of imports increased to 18.6 months. The ratio of short-term debt (original maturity) has fallen to 17.7 per cent at the end of December 2020. The ratio of volatile capital flows (including cumulative portfolio inflows and outstanding short-term debt) to reserves stood at 67.0 per cent. End-December 2020.
These are signs of better elbow room for the RBI when there is a flight of capital.
The idea behind the accumulation of reserves has been that it should serve as a buffer in case an event such as a taper tantrum occurs.
The RBI should have sufficient foreign exchange reserves to prevent a sudden depreciation in the rupee, as seen in 2013, as seen in 2013. However, the rapid accumulation of reserves has added India to the ‘currency manipulator’ watchlist along with other countries of the US government. Das, however, said reserves are an insurance for emerging markets and India will continue to accumulate reserves as needed.
“Our forex operations are primarily driven by the idea of maintaining exchange rate stability, which I think, we have been quite successful. Emerging market economies will have to create their own buffers and the RBI is no exception, Governor Das interacted with the media in the policy talks in June.
Reserves are invested in foreign assets, such as US Treasury bonds. However, in a low-yield environment, the RBI is also struggling to generate adequate returns on its investments. The annual report for 2020-21 showed that the rate of return on foreign currency assets stood at 2.1 per cent in FY21 as against 2.65 per cent a year ago.