Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Forex reserves: India on a growth path? - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Aug 7, 2003

    Forex reserves: India on a growth path?

    Close on the heels of India recording a current account surplus for the second year in succession came the news that for the first time, our country has become a creditor nation to the IMF. In short, India would lend a helping hand to countries that are experiencing a balance of payment problem. For an economy, which about a decade back was struggling to meet three weeks of import bill, the turnaround has been nothing less than dramatic.

    Sitting pretty on a huge US$ 84 bn of foreign exchange reserves, we are now in a position to easily meet 14 months of import bill. But there’s more to this huge reserve than what meets the eye. To make things clearer, lets delve a little deeper into the reason behind the growth in reserves and analyze the three major components of the rise in reserves in FY03 where reserves rose by US$ 21 bn.

    Firstly, the depreciation of the US dollar vis-à-vis other major currencies such as the Euro and the Yen has had a positive impact on the Indian forex reserves. Almost 18% of the accretion in our reserves in FY03 were accounted for by such changes in valuation. (Source: RBI).

    Owing to the recent capital market reforms in India and relatively slow growing economies like US, Europe and Japan, developing economies like India have become much sought after destination for foreign institutional investors. Also, the LIBOR rates at an all time low and rupee appreciating against the dollar, the NRI’s (non resident Indian) are taking maximum advantage of the arbitration opportunities that exist in the Indian markets. The reserves in forex held by Indian banks have swelled and have added US$ 5 bn in FY03. Owing to the above reasons, the net capital inflows for FY03 increased to US$ 14 bn and from almost 67% of the total increase in reserves.

    As far as the current account is concerned, we ran a deficit of US$ 12 bn as our imports exceeded our exports by the said number. This deficit was in the merchandise trade segment, which is nothing but physical shipment of goods. All the forex transactions that do not involve physical shipment of goods fall under the ‘invisibles’ account. These include private remittances by Indians settled abroad, travel receipts and miscellaneous receipts and payments. The miscellaneous segment includes revenues generated through software exports and other such services. In view of the large remittances and strong performance of our knowledge sector, we managed a net invisible gain of US$ 16 bn. Given this backdrop, our overall current account surplus stood at close to US$ 4 bn, accounting for 17% increase in our forex reserves.

    India has thus added close to US$ 37 billion in the last three years to its forex kitty (including the special IMD). What does this mean for a developing economy like India and where do we stand in the global scheme of things? If the reserves are any indication, India is slowly getting attention on the radar of global investors. The middle class boom and rising disposable incomes are also luring the MNC’s into making more investments. It has to be remembered that lack of growth opportunities in key markets has resulted in a shift in preference towards emerging markets (this includes India). The Indian government has also had a positive role to play, albeit slow in momentum.

    Amidst all this, there is however a caveat. As we can see from the break up of forex earnings, a major chunk of the accretion in the reserves was contributed by the capital inflows (FDI and FII). These have to be viewed with some sense of caution, as this money can be taken out of the economy at any point of time. Similar incidences have already taken place in few East Asian economies and we need to be wary of this. Although, all seems to be good, the combined fiscal deficit at 10% of GDP is also an area of concern. Unless the government accelerates measures to improve the fiscal situation, there is every possibility that India may not be able to exploit opportunities going forward.



    Equitymaster requests your view! Post a comment on "Forex reserves: India on a growth path?". Click here!


    More Views on News

    Insider Leaks Equitymaster Stock Picks (The 5 Minute Wrapup)

    Jul 25, 2017

    Equitymaster HQ has been infiltrated. Valuable stock ideas have been leaked. Who's responsible?

    Raymond and Other 'For Profit' Companies Who Don't Care about Shareholder Returns (The 5 Minute Wrapup)

    May 27, 2017

    What happens when minority shareholders are short-changed in the normal course of business?

    Why Commission Driven Model In Mutual Funds Should Be Eliminated... (Outside View)

    Feb 15, 2017

    PersonalFN believes SEBI has taken a step back-apparently in the admission of it going overboard with the regulations.

    This Book Changed How I Looked at the World of Man and Money (Vivek Kaul's Diary)

    Aug 24, 2016

    And here's your chance to claim a free copy of this book...

    The Developed World is Dying because of Demographics, Debt, and Deflation (Vivek Kaul's Diary)

    Aug 12, 2016

    And Why India's demographic dividend could turn out to be a doubtful debt...

    More Views on News

    Most Popular

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    The Most Important Innovation in Finance Since Gold Coins(Vivek Kaul's Diary)

    Aug 10, 2017

    Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms