Analysis of India’s Forex Reserves in COVID Period

Rupesh Bawane Amol Patil

Gokhale Institute of Politics and Economics, Pune Gokhale Institute of Politics and Economics, Pune
rupesh.bawane007@gmail.com amolvasantraopatil8888@gmail.com

2021
Content
1) Introduction………………………………………………………………………………01
2) Objectives of the study…………………………………….……………………………..01
3) Literature review…………………………………………………………………………02
4) Methodology……………………………………………………………………………..03
5) Forex reserves……………………………………………………………………………03
6) Analysis of India’s foreign exchange reserves…………………………………………..04
7) Reasons behind forex increase in COVID period………………………………………..06
8) Limitations of the study………………………………………………………………….06
9) Conclusion..……………………………………………………………………….……..07
10) References………………………………………………………………………………..07
Abstract:
This research paper focuses on analysis of growth and trend in India’s foreign exchange reserves.
Since the 1990’s India’s foreign exchange reserves has grown tremendously, even in COVID
period India’s foreign exchange has shown impressive results. It becomes obvious for any
economics student to develop trust to know reasons behind these growth trends. In this paper we
have tried to explain that trend, growth and reasons behind it. The data used in this paper is
secondary and has been collected from reliable sources like Reserve Bank of India, foreign
exchange board and statistics on Indian Economy. In COVID period many countries have faced
shortage in foreign exchange reserves, we will closely have a look on India’s position in this
time period.
Introduction:
Since the introduction of LPG policy in 1990, India’s foreign exchange reserves has gone
through dramatic change. From the $3.04 billion in 1960-61 and $144.16 billion in 1990-91
India’s foreign exchange has increased all the way up to $582 billion in March 2021. This whole
journey can be break down into several ups and downs in forex market and policy changes by
Indian government. We will closely see those trends and explain inducing factors behind that
change. We will also focus on India’s foreign exchange reserves position in COVID period.
Using data and visualization tools we will represent trends and growth patterns in foreign
exchange reserves.
Objectives of the study:
1) To understand India’s position in foreign exchange reserves
2) To know the trend and changes in foreign exchanges reserves of India
3) To explain the COVID impact on India’s foreign exchange reserves
4) To know the reasons behind this change
5) To understand the overall performance of India’s foreign exchange reserves

1
Literature review:
Reddy (2002), ‘India’s Foreign Exchange Reserves: Policy, Status and Issues’ in this
presentation he clarifies the basic concepts, theory and practices with forex oriented issue in
India. He mainly focuses on: What is forex reserve? Why hold forex reserve and how did the
policy evolve? what are the appropriate level of reserves? And current status in the term of
indicators of adequacy of reserves? He focuses on several aspects of forex management such as
an implication of quasi-fiscal deficit and communication policy of the RBI. This paper is
theoretical and terminology based and conclude that theory and practice of foreign exchange
reserves are as complex as any other contemporary issue. India has walked journey from the
agony of 1991 to comfort of today and this has come about only with hard work and
implementation of prudent policies which has made India, a respected model in the emerging
world.
Charansingh (2006) ‘Should India Use Foreign Exchange Reserves to Finance Infrastructure?’
in this article he shows that India's foreign exchange reserve started increasing after 1990. This
article focuses on the globalization. As mixed economy was converted to the free economy.
Reserve bank of India with consultation to the government of India, manages forex reserves. The
main objectives in managing a stock of reserve for developing country including India is their
long term of purchasing power over good and services and minimizing risk and volatility in
returns. India has followed a policy to build higher levels of foreign exchange reserves that take
into account not only anticipated current account deficit but also liquidity at risk arising from
unanticipated capital movement. Government of India plans to use a part of its foreign exchange
reserves to finance infrastructure because Infrastructure projects in India yield low or negative
returns due to difficulties in political and economic issues especially in adjusting the tariff
structure, introducing labor reforms, skills intensive, and upgrading technology, but there is no
evidence that any other country has used foreign exchange reserves to finance infrastructure. The
amount of foreign exchange reserves in India have is modest when compared to some of the
other countries in the region and where excess of forex reserves can be used to finance
infrastructure projects in India. This way forest storage cost will be utilized for beneficial
infrastructural projects.

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Arunachalam (2010) research work on ‘The development over two centuries’. This research was
made to study the two booming economies with respect to their foreign exchange reserves. This
study mainly based on secondary data published by respective governments and various studies
were done in this area. One of the paradoxes of India’s hugely successful efforts since 1991 to
shore up its reserves is that they are mostly in a basket of foreign currencies that are subject to
volatility and disruptions. Because the foreign market is uncertain and very dynamics in nature.
Any change in a single component affect foreign exchange reserves of the country.

Methodology:
The study is based on secondary data available from reliable sources like Reserve Bank of India
and handbook of statistics on Indian economy. The study covers a period of 60 years from 1960-
61 to 2020-21 but mostly focuses on forex reserves in COVID time. Various graphical tools
have been used to make data more readable and understandable. We also gathered articles on
impact of COVID India’s forex reserves. Which has helped u to explain why forex reserves
increase so dramatically in COVID period.

Forex reserves:
Forex reserves are the external asset used for financing external payments like import-export
bills, debt payment, intervention in exchange markets to affect the currency exchange rate,
remittance payments and many other purposes. These foreign exchange reserves are controlled
by Reserve Bank of India. It has played an important role in managing foreign exchange
reserves since its establishment in 1934, but after the 1990 reforms its role has become even
more important and shown impressive results. These forex reserves are held for mainly
transaction, speculative and precautionary motives. Reserve Bank of India always keep a close
watch on demand, supply of currency and forex reserves.
Forex is composed of gold holdings, special drawing rights (SDR) and foreign currency asset.
Other than these main components position of forex reserves, reserve tranche position with IMF
also plays in important role for financial position of a country.

Forex Reserves

Gold Holdings Special Drawing Rights Foreign Currency Assets

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Countries with largest forex currency reserves
Country Forex
China 33,36,018 Forex
Japan 13,79,412 4,000,000
Switzerland 10,80,384 3,500,000
3,000,000
India 5,82,270 2,500,000
Russia 5,80,900 2,000,000
Taiwan 5,43,330 1,500,000
1,000,000
Hong Kong 4,95,900 500,000
Soudi Arabia 4,50,044 0
a n nd a ia an ng ia a re
in pa la di ss ab re po
South Korea 4,47,600 Ch Ja er In Ru iw Ko r Ko a
itz Ta ng i A h in
g
Singapore 3,82,632 Ho ud ut S
Sw So So

Source: IMF, 2018

Above data represents foreign currency reserves of top 10 countries in 2018. With $3210.0
billion dollar reserves China stands at first position to hold highest forex reserves and India
stands at 8th position with $403.7 billion dollar forex reserves.

Analysis of India’s foreign exchange reserves

India’s foreign exchange reserves has shown a significant rise in past few decades. In 1960-61
India’s foreign exchange reserve was just 3.04 billion dollars which was significantly low till
1990-91 until LPG policy has been adopted. In 1990-91 India has left with very small amount of
forex reserves which can last only for 8 weeks, and looking at India’s import bill our country was
in critical condition with almost no foreign exchange reserves. India went to International
Monetary Funds for debt. IMF gave debt on the conditions that India will liberalize its market to
rest of the world. To meet those conditions India introduced LPG (Liberalization, globalization
and privatization) policy in 1990-91.

1) With the introduction of LPG (Liberalization, globalization and privatization) Indian

markets open for rest of world increasing its trade volume and forex reserves. Therefore,
we see a sharp increase in forex reserves from 114.16 billion dollars in 1990-91 to 743.84
billion dollars in 1995-96. It was a huge increment looking at past reserve amount.
2) Following same pattern forex reserves increased to 1972.04 billion dollars by the end of
2000-01. We see some decrease in forex reserves in 2008-09 due to global recession, but
it does not affect much to Indian market as Indian investors were not much indulged in
stock market and soon forex reserves again started increasing.

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 3) By the end of 2017-18 it went all the way to 27608.50 billion dollars. Which brought
India on 8th rank among the countries who hold largest amount of foreign exchange
reserves. Then after India’s position went improving year by year.

Table: India’s forex reserves in billion dollars

Year SDR Gold Foreign Currency RTP Forex

Assets Reserves
1960-61 - 1.18 1.86 - 3.04
1965-66 - 1.16 1.82 - 2.98
1970-71 1.12 1.83 4.38 - 7.33
1975-76 2.11 1.83 14.92 - 18.86
1980-81 4.97 2.26 48.22 - 55.45
1985-86 1.61 2.74 73.84 - 78.19
1990-91 2.00 68.28 43.88 - 114.16
1995-96 2.80 156.58 584.46 - 743.84
2000-01 0.11 127.11 1844.82 - 1972.04
2005-06 0.12 256.74 6473.27 33.74 6763.87
2010-11 204.01 1025.72 12248.83 131.58 13610.13
2017-18 100.20 1397.40 25975.70 135.20 27608.50
2018-19 100.76 1595.85 26655.64 206.57 28558.82
2019-20 108.00 2305.27 33338.15 270.13 36021.55
Source: IMF, 2020

Forex Reserves
40000

35000

30000

25000

20000

15000

10000

5000

0 5
1960-61 1965-66 1970-71 1975-76 1980-81 1985-86 1990-91 1995-96 2000-01 2005-06 2010-11 2017-18 2018-19 2019-20
 4) We see a gradual increment even in COVID period, from the lockdown in November
2019 many countries have faced reduction in foreign exchange reserves, but India’s
foreign exchange has increased gradually from 27608.50 billion dollars in 2017-18 to
36021.55 billion dollars in 2019-20.

Reasons behind forex increase in COVID period

There are several seasons behind forex reserve increase in COVID period. But some of the
reasons are more prominent than other, which are listed below:

1) Import saving: Worldwide lockdown due to COVID pandemic has shattered global
trade. Which let to import saving to country like India which used to spend huge amount
of forex reserves on crude oil, electronics, gold and many other imports.
2) Fall in crude oil prices: Sharp fall in crude oil prices from $60-70 per barrel to $9-20
per barrel due to COVID pandemic. About 20% of India import bill comes from crude oil
which helped a lot in improving India’s import bill.
3) Foreign portfolio investment inflow: Government’s decision in September to cut
corporate tax rate has attracted huge foreign portfolio investment in India. As per Reserve
Bank of India about $15.10 billion dollars foreign portfolio investment was pumped
between April and December 2019.
4) Foreign direct investment inflow: Between September 2019 and May 2020 about
$29.78 billion dollars of foreign direct investment came into India. In June-July about 1
lakh crore of foreign direct investment came in India as global tech giants invested in Jio
platform.
5) Fall in gold prices: Due to logistic issues, pandemic safety and poor demand gold prices
fallen dramatically in lockdown period. Gold imports fallen to 11.6 tonnes in June 2020
which was 247.4 tonnes in June 2019. Which led to impressive improvement in import
bill.

Limitations of the study:

We tried our best to make this study more reliable but the study is not free from limitations.
There are some limitations one need to keep in mind while reading this paper:

1) Only secondary data has been used in the study with its own limitations
2) The study has been done only in consideration with India
3) There can be many other reasons behind changes in foreign exchange reserves, but we
have considered only major reasons behind the change
4) We tried to explain changes foreign exchange reserves in the time of COVID but the
period is not over yet therefore it’s difficult to reveal its true nature
5) This paper is very short and does not cover many of the other prominent factors affecting
forex reserves

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Conclusion:

India’s foreign exchange reserves has increased impressively in last few decades. Today India
stands at 4th position in having forex reserves. COVID pandemic has crunched India’s import bill
by great extent, which has led to increase in forex reserves to its all-time high position. Today
India has enough forex reserves to finance its imports for more than a year.

References

[1] Arunachalam, P. (2010). Foreign Exchange Reserves in India and China. African Journal of
Marketing Management, 2(4), April, 69-79.

[2] Charansingh  (2006, Feb). Should India Use Foreign Exchange Reserves to Finance
Infrastructure? Economic Political & Weekly, 41(6), 517-525

[3] Reddy (2002), India’s Foreign Exchange Reserves: Policy, Status and Issues’(Special Lecture
by Dr.Y.V. Reddy, Deputy Governor, Reserve Bank of India, at National Council of Applied
Economic Research, New Delhi on May 10, 2002)

[4] Why Countries Hold Foreign Exchange Reserves (investopedia.com)

[5] Special Drawing Rights (SDR) (imf.org)

[6] Importance of Foreign Exchange Reserves (letslearnfinance.com)

[7] https://economictimes.indiatimes.com/markets/forex/indias-forex-reserves-rise-to-582-bn/
articleshow/81710972.cms

[8] https://indianexpress.com/article/explained/explained-india-forex-reserves-covid-19-
economic-crisis-6448701/

[9] https://economictimes.indiatimes.com/markets/forex/covid-effect-forex-reserve-posts-
biggest-weekly-fall-in-12-years/articleshow/74850984.cms?from=mdr