Surging forex reserves to help improve economic outlook

In 1980, India had forex reserves of over $7 billion, more than double the level ($2.55 billion) of what China had at that time. However, today China has close to $4 trillion of forex reserves, which is near 12 times India's reserves of $337 billion! India could cross $100 billion mark only in 2004 and hit a record high holding of forex reserves in May 2008 at $315 billion.

However, India was forced to sell dollars to the extent of close to $35 billion in the spot markets in FY2009 due to 22% depreciation in rupee (against the dollar) in the same fiscal year. Once again, India sold dollars to the tune of about $20 billion in the spot markets in FY2012 when the rupee fell again 12%. India sold cumulatively about $59 billion of dollars during the period FY2009 to FY2013 to basically support the rupee.

The RBI resumed purchases of dollars from the open markets significantly from FY2014 – it purchased $8.992 billion of dollars from the open markets in the same financial year. However, the recent oil price crash came as a boon to India. The RBI has purchased a whopping $41.337 billion in the first 10 months of the current fiscal. About 60% of these purchases were done in just 4 months during October- 2014 to January 2015, the period which witnessed 47% crash in crude oil prices.

Thanks significantly to these dollar purchases, India's forex reserves today stands at a record level of about $338 billion. India is too far behind China in terms of quantum of forex reserves. However, India stands 9th in global ranking of forex reserves and holds just about $25 billion lesser than what South Korea, Brazil and Russia (which stand ahead of India) hold now. While the continued meltdown in the oil price is likely to help further accumulation of forex reserves by India, the same is likely to hamper the forex holding of Russia (oil & gas sector accounts for 70% of its total export earnings). Similarly the export earnings of Brazil (which accounts for 50% of global sugar exports) are likely to be impacted on account of all-time low international sugar prices. Therefore, India has a good chance of hitting the 6th spot in terms of global ranking of forex reserves within one or two years due to RBI's smart strategy of aggressive accumulation of dollar from the spot markets. The same would help in improving the economic outlook of India and also that of domestic equity markets significantly going forward and also in mitigating any possible risk from FIIs outflows on account of US Fed's interest rate tightening.