India’s foreign exchange reserves have grown by $63 billion between May 24, 2014, when Narendra Modi was sworn in as Prime Minister, and May 5, 2017, handsomely outstripping the $52 billion increase between May 22, 2009, and May 23, 2014, under the rule of UPA Prime Minister Manmohan Singh, an analysis of RBI data shows.
“The accumulation of forex reserves by RBI since early 2014, net of the foreign currency non-repatriable (FCNR) outflows, is in line with large foreign capital inflows, particularly foreign direct investment, reflecting India’s status as a very attractive investment destination,“ said Saugata Bhattacharya, chief economist, Axis Bank.
Significantly, India received record FDI inflows since the Modi government took charge. Net FDI inflows amounted to close to a $100 billion in the last three years. Economists said the overall improvement in various macroeconomic parameters also contributed.
“An impressive turnaround in most macroeconomic parameters, led by external sector and inflation management, along with consistent reforms push by the government has naturally attracted global capital flows,“ said Shubhada Rao, chief economist at Yes BankBSE -0.78 %. “In an environment where surfeit of global liquidity seeks returns, India with her macroeconomic and political stability, has been the recipient of robust inflows, thereby helping accelerate accumulation of forex reserves.“ The surge in reserves has posed a management challenge for the central bank. An estimate Rs 1.1 lakh crore has been converted into liquidity due to the high value notes ban in November adding to domestic liquidity, the surge in foreign exchange is further addition to liquidity.
Rupee liquidity since the accretion of reserves since March amounted to Rs 17,350 crore. Though the amount is ` not alarming, the central bank has to manage overall liquidity in a way as to also maintain the value of rupee to the dollar at a fair level.
RBI has used multiple instruments, spot, forwards and futures, to manage these flows in a situation of surplus domestic liquidity.
“Global policy tightening might moderate some of these flows, but prospects of high economic returns will still bring foreign investors in, necessitating additional measures to manage liquidity“ said Bhattacharya.
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