Fri. Mar 5th, 2021

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The  jump  in  forex reserves may not be a positive sign

2 min read
Sudden surge

Amid the covid-19 pandemic, India’s foreign exchange (forex) reserves have been going up at a very fast pace and have touched a new high, in absolute terms, almost every week.

Between 27 March and 14 August this year, foreign exchange reserves rose 12.6% to $535.25 billion. The interesting thing is that during a similar period in 2019, forex reserves rose by just 4.5% to $430.5 billion. Clearly, there has been a very rapid increase in the country’s foreign exchange reserves since March-end, after the negative economic impact of the coronavirus pandemic was first felt. Some economic and political commentators have tried to pass this increase as evidence of improvement in the overall state of the economy. But there’s much more to it than meets the eye.

A large part of the foreign exchange reserves is used to pay for imports. Goods imports between April and July fell 46.7% to $88.9 billion. Hence, lesser reserves have been used to pay for imports. This essentially shows a slump in economic activity since the onset of lockdown. India imports a large part of the crude oil that it consumes. During the first four months of the current fiscal year, the country imported around 82% of the total oil it has consumed. Nevertheless, the total oil and petroleum products imports have fallen by 55.9% to $19.6 billion, a clear impact of the lockdown.

While imports fell by 46.7% in the first four months to $88.9 billion, goods exports fell by 30.3% to $74.9 billion. Hence, the trade deficit, the difference between imports and exports, fell by 76.5% to $14 billion as against $59.4 billion last year. This difference of $14 billion was more than made up for through other sources, pushing up the reserves.

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