The Indian economy is going through one of its worse phases in living memory. Yet, not all is lost. The country’s foreign exchange reserves are at an all-time high of over Rs 37.92 lakh crore, according to data released by India’s central bank on June 12.
The strong forex pool provides stability in today’s grim economic conditions. “There is of course a cost to having very high FX reserves [it earns low returns], but that cost needs to be weighed against the aspect of financial stability that it provides,” said Arvind Chari, head-fixed income and alternatives, Quantum Advisors.
The rise of forex
The reasons behind the swelling forex reserves are India’s shrinking import bill, an increase in foreign direct investments, improved inflows from foreign portfolio investors into the stock and debt markets, and the Reserve Bank of India’s buying spree.
Brent crude oil prices have fallen sharply since the beginning of the year, hitting a 20-year low in April. This means India has to shell out fewer dollars for importing oil, which makes up a large part of its imports. India is likely to save $59 billion on oil imports this year, according to a report dated May 26 by Mumbai-based Motilal Oswal Financial Services.
Besides this, foreign money flowing into India is filling the…