How Has India Built Large Forex Reserves Despite Perennial Trade Deficits?

India's forex reserves of nearly $640 billion are the 4th largest in the world despite the fact that it runs trade deficits year after year.  Other nations among the top 5 with the biggest US dollar reserves are China ($3.4 trillion), Japan ($1.4 trillion) , Switzerland  ($1.1 trillion) and Russia ($623 billion). They have all accomplished this feat by running large trade surpluses for many years. 

History of India's Trade Deficits in billions of US dollars. Source...

So how did India manage to build over $600 billion in US dollar reserves? The top contributor to India's reserves is debt which accounts for 48%. Portfolio equity investments are known as “hot” money or speculative money flows accounted for 23% of India's forex reserves, according to an analysis published by The Hindu BusinessLine

While India has accumulated the largest forex reserves in its history, its debt to GDP ratio is also nearing an all-time record of 90%, the highest in the South Asia region. India's debt has risen by 17% of its GDP in the last two years, the most of any emerging economy. By contrast, Pakistan's debt to GDP ratio has increased by a mere 1.6% to 87.2% from 2019 to 2020.

India's Rising Debt. Source: Business Standard

The International Monetary Fund (IMF) has projected the Indian government debt, including that of the center and the states, to rise to a record 90.6% of gross domestic product (GDP) during 2021-22 against 89.6% in the previous year. By contrast,  the percentage of Pakistan's public debt to Gross Domestic Product (GDP) including debt from the International Monetary Fund, and external and domestic debt has fallen from 87.6% in Fiscal Year (FY) 2019-20 to 83.5% in FY 2020-21.    

While large reserves are a source of comfort in terms of balance of payments and currency stability, it also has significant downsides. The biggest risk is the interest rates on the debt (accounting for 48% of India's US$ reserves) which depend heavily on the US Federal Reserve's monetary policy. Should the Fed decide to raise interest rates to tighten money supply amid inflation concerns, the cost of servicing the US dollar denominated debt will rise. 

The second big worry is that the "hot money" accounting for 23% of India's US$ reserves could suddenly decide to leave India for better returns elsewhere. This happened in the Asian Financial Crisis of 1997-98. It began in Thailand and then quickly spread to neighboring economies. Initially, it was a currency crisis when Bangkok unpegged the Thai baht from the U.S. dollar that set off a series of currency devaluations and massive flights of capital. 

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Comment by Riaz Haq on July 4, 2022 at 6:14pm

India's trade deficit at record high of $25.63 billion in June

https://www.cnbctv18.com/economy/trade-deficit-at-record-25-63-bill...

India's merchandise trade deficit grew to a record $25.63 billion in June from $9.61 billion during the same period last year, stated the data released by the Commerce Ministry.

The trade deficit in the April to June period this year was $70.25 billion.

The country's merchandise exports increased by 16.8 percent year-on-year to $37.9 billion in June 2022, the highest-ever recorded in the month, the data stated.
On the other hand, imports expanded to 51.03 percent year-on-year to $63.58 billion. The monthly imports and trade decifit were among the highest-ever, in June 2022.
The merchandise exports during the first quarter of this fiscal year jumped 22 percent to $116.7 billion, the highest-ever exports recorded during the first quarter.

Non-petroleum exports increased by 11.9 percent to $92.5 billion in the first quarter, which also recorded a major rise in the exports of petroleum products, electronic goods and readymade garments.
The country saw a positive growth in imports of top 10 major commodity groups from June 2021 to June 2022. There was a 94.17 percent rise in petroleum and crude import, 241 percent rise in coal and coke import, 169 percent increase in gold import and 51 percent rise in total imports.
Cotton yarn exports fell by 22.54 percent, plastic exports reduced by 22.23 percent, engineering goods by 1.57 percent and drug and pharma exports by 1.27 percent.
There was a positive growth in all other major export categories from June 2021 to June 2022.

Comment by Riaz Haq on July 6, 2022 at 8:00am

#India announces measures to boost #forex inflows to staunch #Indian currency’s recent fall to record lows. #RBI raises borrowing limit for companies to $1.5 billion. Move comes after #India #rupee tested record lows. #BJP #Modi #Hindutva https://www.bloomberg.com/news/articles/2022-07-06/india-relaxes-ru... via @markets

India’s central bank mounted a fresh defense of the beleaguered rupee, announcing a raft of measures to boost foreign exchange inflows and stem a rout in the local currency.

The steps include doubling borrowing limits for companies from overseas to $1.5 billion during a financial year, the Reserve Bank of India said in a statement Wednesday. It also temporarily removed any interest-rate ceiling for banks to attract deposits from non-residents and liberalized rules for foreigners to invest in local currency government and corporate debt.

Comment by Riaz Haq on July 10, 2022 at 8:02am

Indian rupee may face more heat as repayments worth $267 bn of $621 bn external debt come up


https://economictimes.indiatimes.com/news/economy/finance/re-may-fa...


The rupee, which Tuesday fell to a new record low on unabated withdrawals by portfolio investors amid tightening global monetary conditions, could face further pressure as record external debt comes up for repayment through the course of this fiscal year and the next and India's trade gap widens.

More than 40%, or $267 billion worth of external debt of the total $621 billion, is due for repayment in the next nine months, the Reserve Bank of India data showed. This repayment is equivalent to about 44% of the India's foreign exchange reserves.

"The current local macro setup is driven by a record current account deficit, primarily due to oil imports," said Ashhish Vaidya, managing director, DBS Bank India. "Coupled with this, the overall dollar strength, triggered by higher US rate trajectory and risk-off sentiment, is contributing to rupee's rout."

Comment by Riaz Haq on August 2, 2022 at 7:48am

#India’s #Trade #Deficit Widens to Record On Costly Imports, Weak #Rupee. The gap between #exports and #imports widened to $31.02 billion in July, from $26.18 billion in June. #Modi #BJP #Economy #Inflation #Currency #Forex https://www.bloomberg.com/news/articles/2022-08-02/india-s-trade-ga...

India’s trade deficit ballooned to a record high in July, as elevated commodity prices and a weak rupee inflated the country’s import bill.

The gap between exports and imports widened to $31.02 billion in July, from $26.18 billion in June, B.V.R Subrahmanyam, India’s trade secretary, told reporters at a briefing in New Delhi Tuesday, citing preliminary data. The trade deficit in June was a record before the latest numbers were released.

Comment by Riaz Haq on August 3, 2022 at 7:54am

Record #trade deficit adds to #India's external balance challenges, #Indian currency woes. QuantEco Research revised their CAD projections for India higher for the current fiscal year to $130 billion from $105 billion. #Forex #INRUSD #economy #deficit https://www.reuters.com/world/india/record-trade-deficit-adds-india...

India's record high trade deficit in July signals a further deterioration in the country's external balances, which is likely to keep the rupee under pressure, analysts said on Wednesday.

Trade deficit in Asia's third largest economy widened to an all-time high of $31 billion, data on Tuesday showed, prompting concerns about the country's ability to fund its current account deficit and hurting the outlook for the rupee.

"I think after looking at the July trade deficit, we need to re-work on our CAD and BoP number, and thus the view on the rupee", Vikas Bajaj, head of currency derivatives at Kotak Securities, said.

Bajaj pointed out that until now the market consensus for India's current account deficit (CAD) was around $100 billion for the current fiscal year ending in March.

"But this definitely looks out of whack after July's trade number," he said.

In a note on Wednesday, QuantEco Research revised their CAD projections higher for the current fiscal year to $130 billion from $105 billion and the balance of payments (BoP) estimate to $60 billion from $35 billion.

The partially convertible rupee was trading at 79.02 per U.S. dollar in afternoon trade, 0.4% weaker on the day. On Tuesday, the unit had touched 78.49, its highest level since June 28. The local currency hit a record low of 80.0650 on July 19.

Vivek Kumar, a economist at QuantEco, said the recent recovery in the rupee from 80 will prove to be temporary and expects the local unit to fall to 81 to the dollar in the current fiscal year.

Bajaj said the recovery on the rupee was "broadly done" and that the currency "should once again see slow and steady move towards 80+ levels".

Comment by Riaz Haq on September 16, 2022 at 10:37pm

From The Print News Youtube channel:

India’s Forex reserve lose $80 bn in 8 months as RBI defends rupee, quarterly CAD at alarming level

https://youtu.be/NXns1Im7QNg

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Indias foreign exchange reserves fall to lowest in 23 months

https://www.business-standard.com/article/finance/india-s-forex-res...

The Reserve Bank of India’s (RBI’s) headline foreign exchange reserves declined by $7.9 billion to $553.11 billion in the week ended September 2, the latest central bank data showed.

The reserves are at their lowest since October 9, 2020, the RBI data showed. Analysts cited the RBI’s defence of the rupee through dollar sales amid a globally strengthening greenback as one of the reasons for the fall in reserves.

Incidentally, during the week that ended September 2, the rupee marked a fresh intraday low of 80.13 per US dollar.

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Why are India's foreign reserves depleting, and what could it mean for the country? - BusinessToday

https://www.businesstoday.in/latest/economy/story/why-are-indias-fo...

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