An Analysis of Foreign Exchange Reserves in India since 2001-

2018
Shubhangini Parmar (26), Simran Saluja (27), Sneha Hude (28), Saumya Singh (29),
Soumika Mitra (30), Vaishnavi Nachan (31)

I. Abstract
In today’s world, large Foreign Exchange Reserves and its strengthened balance
of payments symbolizes the country’s strength and worth, as it indicates the
strong backing the currency of the country has. There are many Macroeconomic
variables attracting the Foreign Exchange Reserves for a nation. The study is an
attempt in such nature of analysing the impact of the Foreign Exchange Reserve
on Indian economy from past 18 years.

Introduction
In simplest terms foreign exchange reserves are the foreign currencies which are
held by the central bank to support liabilities on the issued currency and also a
way to influence the monetary policies of the country. It includes government
securities, bonds, bank notes, bank deposits and treasury bills. Regardless of the
size of the economy almost all countries in the economy hold significant foreign
exchange reserves and most of them being held in U.S dollars which is the most
traded currency. Other currencies in reserves are British pound sterling, euro,
Chinese Yuan, and Japanese Yen. Theorists believe that holding reserves in
currencies which is not immediately connected to its own is best policy. As of
August 2018 China holds the largest foreign exchange reserves $3210.0 billion.
The holding of forex is used to back the one’s domestic currency. Countries who
wish to have fixed exchange rate uses forex reserves as a tool of monetary policy.
Central institution has ability to exert some control over exchange rates by
retaining the option to shove reserves from another currency in to the market.
It may be recalled that in February 2004, the Reserve Bank had started a process
of compiling half yearly reports and placing them in the public domain for
bringing about more transparency and enhancing the level of disclosure in
relation to management of the country’s foreign exchange reserves.

2. Objectives
 The study is aimed at analyzing the trend in Foreign Exchange Reserves and its
components in India. The period of study is defined from 2011 to 2018 and is
based on secondary data.
II. To understand the theoretical framework of forex reserves and their significance
in the economic development.
To statistically analyze the trends in the Forex Reserves of India

Components of Foreign Exchange Reserves

Special Drawing Rights
“The SDR is an international reserve asset, created by the IMF in 1969 to
supplement its member countries’ official reserves. As of March 2016, 204.1
billion SDRs (equivalent to about $285 billion) had been created and allocated to
members. SDRs can be exchanged for freely usable currencies. The value of the
SDR is based on a basket of five major currencies—the U.S. dollar, euro, the
Chinese renminbi (RMB), the Japanese yen, and pound sterling—as of October 1,
2016.”-IMF

The role of the SDR

“The SDR was created by the IMF in 1969 as a supplementary international
reserve asset, in the context of the Bretton Woods fixed exchange rate system. A
country participating in this system needed official reserves—government or
central bank holdings of gold and widely accepted foreign currencies—that could
be used to purchase its domestic currency in foreign exchange markets, as
required to maintain its exchange rate. But the international supply of two key
reserve assets—gold and the U.S. dollar—proved inadequate for supporting the
expansion of world trade and financial flows that was taking place. Therefore, the
international community decided to create a new international reserve asset
under the auspices of the IMF.” -IMF

a. Gold Reserves
Gold played a central role in the international monetary system until the collapse
of the Bretton Woods system of fixed exchange rates in 1973. Since then, its role
has diminished. But it remains an important asset in the reserve holdings of
several countries, and the IMF is still one of the world’s largest official holders of
 gold. In line with the new income model for the Fund agreed in April 2008, profits
from limited gold sales were used to establish an endowment, and used to boost
the IMF’s concessional lending capacity to eligible low-income countries (LICs).

The IMF holds around 90.5 million ounces (2,814.1 metric tons) of gold at
designated depositories. On the basis of historical cost, the IMF’s total gold
holdings are valued at SDR 3.2 billion (about $4.5 billion), but at current market
prices, their value is about SDR 80.1 billion (about $112.7 billion).

The IMF acquired its gold holdings through four main channels:
 When the IMF was founded in 1944 it was decided that 25 percent of initial quota
subscriptions and subsequent quota increases were to be paid in gold. This
represents the largest source of the IMF's gold.
 All payments of charges (interest on member countries' use of IMF credit) were
normally made in gold.
 A member wishing to acquire the currency of another member could do so by
selling gold to the IMF. The major use of this provision was sales of gold to the
IMF by South Africa in 1970–71.
 Member countries could use gold to repay the IMF for credit previously
extended.

The Second Amendment to the Articles of Agreement in April 1978

fundamentally changed the role of gold in the international monetary system by
eliminating its use as the common denominator of the post-World War II
exchange rate system and as the basis of the value of the Special Drawing Right
(SDR). It also abolished the official price of gold and ended its obligatory use in
transactions between the IMF and its member countries. It furthermore required
the IMF, when dealing in gold, to avoid managing the price of gold, or establishing
a fixed price.

Reserve Tranche Position

International Monetary fund is financed by member’s quota. Each member of the
IMF is assigned a quota part of which is payable in SDR’s or specified useable
currencies (Reserve Assets) and part in member’s own currency. The difference
between a member’s quota and the IMF’s holding of its currency is a country’s
 Reserve Tranche Position (RTP). The reserve tranche position of the quota can be
accessed by the member at any time, whereas the rest of the member’s is
typically inaccessible.

Importance of Foreign Exchange Reserves

Foreign exchange reserves increase the confidence in the monetary policies as
well as exchange rate policies of the government. The capacity of the central bank
to intervene in foreign exchange market and to control any adverse movement is
enhanced. Also the capacity to stabilize the forex rates to provide more favorable
economic environment for the country is also enhanced.
During the crises forex reserves come to the rescue of any country and absorb
the distress or shocks. Domestic currency gets backed by external assets and is
good for equity market since the forex reserves are strong then people from
different countries wants to invest in the country.

a. Research Methodology
Sources of data:
Data for the study is collected from secondary sources. The study is based on
published sources of data collected from journals, magazines, websites likes i.e.
www.rbi.org.in, Central Statistical Organization (CSO), Handbook of statistics on
the Indian economy were used.

Period of study:
The data for this study was collected from the time period 2011 to 2018.

Statistical Analysis of Trends in Forex Reserves in India

Foreign currency reserves are crucial to a nation’s economic welfare. Without
sufficient reserves, an economic can crush to a halt. The country may be
incapable to pay for essential imports like crude oil, or service its external debt.
“The International Monetary Fund (IMF) defines reserve assets as
external assets that a country’s monetary authority can use to meet balance of
payments financing needs, use to affect currency exchange rates in currency
exchange markets, and other related purposes. Most nations hold the vast
majority of their foreign currency reserves in U.S. dollars and a much smaller
portion in euros. “—IMF
B. Data Collection and Analysis

1) The foreign reserve of INDIA from year 2001 to 2018 :

YEAR FOREIGN YOY %( )

RESERVE(US$IN BN)
2001 42.3 11
2002 54.1 28
2003 75.4 39
2004 113.O 50
2005 141.5 25
2006 151.6 7
2007 199.2 31
2008 309.7 55
2009 252.0 -19
2010 279.4 11
2011 304.8 9
2012 294.4 -3
2013 292.0 -1
2014 304.2 4
2015 341.6 12
2016 360.2 5
2017 424.8 17.9
2018 405.1 -4.8
 ANALYSIS OF FOREIGN RESERVE OF INDIA
450 424.8
405.1
400 360.2
341.6
350 309.7 304.8294.4 292 304.2
300 279.1
252
US$IN BN

250
199.2
200
141.5151.6
150 113
100 75.4
42.3 54.1
50
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
YEARS

FOREIGN RESERVE

INTERPRETATION
There was increase in foreign reserve since 1991 because of 1991 reform i.e LPG
.These reform reduce the rules and regulation and tariff from the export and
import duties. These reform increase the FDI and FII and decreases the India
current deficit which was high as 3.1% in 1991 and turned into surplus in year
2002-2003.
The major reason for increase have been – Foreign investment , banking capital ,
short term credit etc.
There was gradually decrease in year 2009 because of 2008 global financial crisis
.These crises decrease the FDI (foreign direct investment), there was increase in
oil price because of which the current deficit increases and fall in foreign reserve.
There was very slow growth in the 2009 but the foreign reserve started increasing
and the reason is decrease in crude oil , currency depreciated( rs), increase in FDI
and all. The foreign reserve was highest in year 2017 and the decrease in 2018
because of US-CHINA war there is decrease in the foreign reserve by 4.8%

2) Here are the 10 countries with the largest foreign currency reserve assets as of
August 2018. All reserve assets are given in billions of U.S. dollars

Ranking of countries according to their forex reserves holding

 Foreign Currency Reserves (in billions
Rank Country of U.S. dollars)
1 China $3,210.0
2 Japan $1,259.3
3 Switzerland $804.3
Saudi
4 Arabia $501.3

5 Russia $460.6
6 Taiwan $459.9
7 Hong Kong $424.8
8 India $403.7
South
9 Korea $402.4
10 Brazil $379.4

(Source: IMF, 2018)

Foreign Currency Reserves (in billions of U.S. dollars)

379.4
402.4
403.7

424.8
3,210.00
459.9

460.6

501.3

804.3
1,259.30

1 China 2 Japan 3 Switzerland 4 Saudi Arabia 5 Russia

6 Taiwan 7 Hong Kong 8 India 9 South Korea 10 Brazil

Interpretation
From the above table, we conclude that the ranking of India compared to the
largest 10 countries in terms of foreign currency reserve is on 8th position where
as China and Japan is on 1st and 2nd position respectively.
Ranking of countries according to their forex reserves holding (Excluding Gold
Reserve)

Foreign Currency
Reserves (in millions of
Rank Country U.S. dollars, $)
1 China 30,53,100
2 Japan 12,52,870
3 Switzerland 7,37,806
Saudi
4 Arabia 4,87,259
5 Russia 4,63,800
6 Taiwan 4,61,784
7 Hong Kong 4,23,100
South
8 Korea 4,02,500
9 India 3,94,465
10 Brazil 3,80,679

Foreign Currency Reserves (in millions of U.S. dollars, $)

380,679
394,465
402,500

423,100

3,053,100
461,784
463,800

487,259 737,806
1,252,870

1 China 2 Japan 3 Switzerland 4 Saudi Arabia 5 Russia

6 Taiwan 7 Hong Kong 8 South Korea 9 India 10 Brazil
Interpretation
From the above table we compared the position of India in terms of Foreign
currency reserve excluding gold with largest 10 countries. India is on 9th position
where as china and japan is on 1st and 2nd position respectively. This indicates that
India fall 1 position down after excluding the gold reserve from total reserve
which is the indication that gold reserve is important part of India in term of
foreign reserves.

Foreign Exchange Reserves in India Currency from 2001 to 2018 (in billion).

Year (End Of Foreign Currency

March) Gold RTP SDR Assets Total
2001 127 29 0.11 1845 2001
2002 149 30 0.5 2491 2671
2003 168 32 0.19 3415 3615
2004 182 57 0.1 4662 4901
2005 197 63 0.2 5931 6191
2006 257 34 0.12 6473 6764
2007 296 20 0.08 8366 8682
2008 401 17 0.74 11960 12379
2009 488 50 0.06 12301 12839
2010 812 62 226 11497 12597
2011 1026 132 204 12249 13611
2012 1383 145 229 13305 15062
2013 1397 125 235 14126 15883
2014 1296 110 268 16609 18283
2015 1192 81 249 19855 21377
2016 1334 163 100 22191 23788
2017 1288 151 94 22449 23982
2018 1530 179 107 27218 29034
(Source: data.gov.in)
 Forex Reserves
70000

60000

50000
in billion

40000

30000

20000

10000

0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Components

Year (End Of March) Gold RTP SDR Foreign Currency Assets Total

(Forex Reserves from 2001 to 2018)

b. Observations
A. Gold Reserves in India from 2014 to 2018

Total
Year (End Of March) Gold Reserve Percentage
2014 1296 18283 7.09
2015 1192 21377 5.58
2016 1334 23788 5.61
2017 1288 23982 5.37
2018 1530 29034 5.27

The gold reserves India decreased in year 2015 as compared to previous year.
The total share of gold in Foreign exchange reserves has been approximately 5%
of total reserves ever since.
B. Reserve Tranche Position Over 5 years and its share in Total Reserves
 Year (End Of
March) RTP Total Percentage
2014 110 18283 0.60
2015 81 21377 0.38
2016 163 23788 0.69
2017 151 23982 0.63
2018 179 29034 0.62

Reserve Tranche Position has declined in year 2015, however it is increasing in

the past and stand at 179 (billion) in 2018, percentage share in total in 2018 is
0.62%. RTP comprises small part of the total reserves.

C. Special Drawing Rights over period of 5 years

Year (End Of
March) SDR Total Percentage
2014 268 18283 1.47
2015 249 21377 1.16
2016 100 23788 0.42
2017 94 23982 0.39
2018 107 29034 0.37

Special Drawing Rights has decreased since 2014. In percentage terms it was
1.47% in 2014 but in 2018 it was 0.37% of total reserves
D.Foreign Currency

Year (End Of Foreign Currency

March) Assets Total Percentage
2014 16609 18283 90.84
2015 19855 21377 92.88
2016 22191 23788 93.29
2017 22449 23982 93.61
2018 27218 29034 93.75
It is the foreign currency which makes the most of total reserves, about 90% of
the foreign currency has share in total reserves in 2014. The trend did not break
and till 2018 foreign currency still holds major share in total reserves of about
93.75%.
Components of Total Reserves in India (2018)

Components of Forex Reserves(2018)

1530 179
107

29034
27218

Gold RTP SDR Foreign Currency Assets Total

Correlation between different components (Year 2018)

Correlation Between (2018) Percentage
Foreign Currency Gold 5.62
Foreign Currency Reserve Tranche Position 0.66
Foreign Currency Special Drawing Rights 0.39
Gold Reserve Tranche Position 11.7
Gold Special Drawing Rights 6.7
Reserve Tranche Position Special Drawing Rights 59.78

Reasons behind the surge in India’s Forex Reserves are:

• Favourable BoP: As per the Economic Survey 2016-17 (Volume II), India’s
balance of payments (BoP) situation, which was benign and comfortable during
2013-14 to 2015-16, further improved in 2016-17. This was largely as a result of
low and falling trade and current account deficits (CAD) and moderate and rising
capital inflows.
• Narrowing trade deficit: Reflecting the slowly improving world economic
situation, India’s exports turned positive at 12.3% in 2016-17 after an
interregnum of two years. This, along with a marginal decline in imports by 1.0%
resulted in narrowing down of trade deficit to USD 112.4 billion (5% of GDP) in
2016-17 as compared to USD 130.1 billion (6.2% Of GDP) in 2015-16.
The trend is continuing in the FY 2017-18 also. In the Q1 of FY 2017-18 (April-
June), there was double digit export growth at 10.6%, with export growth
continuing to be in positive territory continuously for the last eleven months.
• Narrowing Current Account Deficit: The current account deficit (CAD) narrowed
down progressively to 0.7% of GDP in 2016-17 from 1.1% of GDP in 2015-16 led
by a sharp contraction in trade deficit which more than outweighed a decline in
net invisibles earnings.
• Rise in capital flows: Though the net capital inflows were slightly lower at USD
36.8 billion (1.6 per cent of GDP) in 2016-17 as compared to USD 40.1 billion (1.9
per cent of GDP) in the previous year, mainly due to fall in NRI deposits, the Gross
FDI inflows to India increased significantly to USD 60.2 billion in 2016-17 from
USD 55.6 billion in 2015-16.
• Low credit take-off: As per the Economic Survey 2016-17 (volume I), withdrawal
of legal tender status of Rs 500/- and Rs. 1,000/- bank notes on 9 November 2017
(demagnetization) had an impact on the credit take-off. During 2016-17, gross
bank credit outstanding grew at around 7% on an average. The average gross
bank credit to industry contracted by 0.2 per cent in the FY 2016-17.

Impact of surge in forex reserves

Holding foreign exchange reserves entails both benefits and costs. While the
surge in reserves can provide liquidity buffers, smoothen external shocks and
potentially avoid disruptive output adjustments, it would also put appreciation
pressures on the rupee and could lead to excess liquidity, which in turn would
create challenges for the RBI to manage its monetary policy.
Some of the benefits to the economy due to increase in forex reserves are –
• The ability to absorb shocks from external sources and the volatility in the global
economy will increase. In fact, Indian policy makers started focusing on the
accumulation of forex reserves to avoid East Asian financial crisis-like situation
that suffered adversely due to the flight of capital in South Korea, Malaysia,
Indonesia in 1997. The fact that India’s position of having about enough
resources to cover only three-weeks of imports in 1991, to have sufficient forex
 reserves to cover roughly eleven months of imports is an outcome of well
executed policy.
• The component of the short-term debt in the overall external debt is set to
decline. This impact the economy in a positive way as the long-term debt comes
with a lesser interest rate when compared to short-term debt.
• The ‘excess reserves’ will be utilized for undertaking currency swaps and
extending lines of credit. They will be also utilized for contributing to the
multilateral bodies like the International Monetary Fund (IMF) that will help India
in deepening soft power.
• The surge in forex reserves will lead to an appreciation of the value of the rupee.
Strong rupee will help India in reducing the import bill. As India imports around
70% of crude oil, the reduced energy bill will help in curtailing the inflation.

Despite the above mentioned benefits, the surge in forex reserves is not without
its drawbacks. Some of them are mentioned below.
• The appreciation of the rupee is likely to have an adverse impact on India’s
exports, more specifically on the ‘invisibles’ like BPO as third world countries will
be ready to offer the same services at cheaper rates to the developed countries.
• As the RBI holds the foreign exchange reserves, mostly in the form of low-
yielding short-term US treasury (and other) securities, which attract a very low
interest rate, forex accumulation also involves incurring some opportunity costs
beyond a certain limit. Moreover, as the demand for financial resources to
support developmental projects is always greater than the available supply in
India, it is not completely justified to keep these precious funds unemployed for
a longer period.

D. Findings
 Foreign reserve plays a crucial role in the strengthing and weaking of country’s
economy.
 It help in knowing the demand and supply of foreign currency in the market.

E. Conclusion
 The analysis of the data reveals that foreign exchange reserves have significantly
changed over the years. Total reserves have increased from 2001 billion to 29034
billion in 2018, which shows an increase of 93.11 %.
Gold reserves have also increased and have a share of 5.27% in total reserves in
2018. Reserve tranche position has increased and stands at 0.62% of total
reserves in 2018. Special drawings rights stand at 107 billion with a percentage
share of 0.37%. Foreign currency stands at 27218 billion with a percentage share
of 93.75%, which shows that it is foreign currency reserves that are backing our
foreign exchange reserves. Foreign currency reserve is the only component that
has shown an increase in our period of study.

F. Recommendations
India has accumulated more excess reserves than necessary to avoid any
unforeseen financial calamity in the near future. Moreover, as the opportunity
cost of reserves holding is high for the RBI, the regulator must explore alternative
uses of the excess reserves such as investment in infrastructure, re-capitalisation
of public sector banks, investment in overseas financial markets or repayment of
costly external debt.

G. Bibliography
1 http://www.investopedia.com/terms/f/foreign-exchange-reserves.asp
2 http://www.investopedia.com/articles/investing/033115/10-countries-biggest-
forex-reserves.asp
3 http://www.imf.org/external/np/exr/facts/sdr.htm
4 https://www.imf.org/en/About/Factsheets/Sheets/2016/08/01/14/42/Gold-in-
the-IMF
5 http://www.letslearnfinance.com/why-foreign-exchange-reserves-are-
important.html
6 http://www.investopedia.com/articles/investing/033115/10-countries-biggest-
forex-reserves.asp
7 https://community.data.gov.in/forex-reserves-of-india-from-2010-11-to-2016-17/