India's Foreign Exchange Reserves Hit $400 Billion For First Time: 5 Points

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India's Foreign Exchange Reserves Hit $400 Billion For First Time: 5 Points

Posted on : Saturday 16th of September 2017

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India's foreign exchange reserves crossed the $400 billion mark for the first time ever, strengthening hopes that the country will be able to withstand an expected reduction in stimulus by US central bank later in the year. The country's forex reserves surged by $2.604 billion to reach an all-time high of $400.726 billion in the week ended September 8, 2017, Reserve Bank of India said in a release on Friday. The surge in India's forex reserves is likely to help rupee withstand any volatility that may be seen on exodus of foreign funds from India's debt and equity markets, analysts say. Foreign institutional investors have pumped in more than Rs. 1 lakh crore in to Indian debt and equity market in last 12 months.

Here are 5 things to know about the surge:

1) The surge in India's forex reserves is mainly on account of foreign portfolio flows. High real rates of interest and nearly 6 per cent rise in rupee value against the US dollar has attracted foreign flows in to debt market.

2) However, analysts believe that portfolio flows are likely to come down going ahead. "We expect portfolio inflows to slow in the coming months," Economist Radhika Rao of DBS Bank told Bloomberg.

3) Ms Rao expects current account deficit to double to 1.4 per cent of gross domestic product (GDP) in the year through March 2018. For the quarter ended June 30, 2017, current account deficits rose to $14.3 billion to 2.4 per cent of GDP. In the same quarter last year, current account deficits were $401 million or 0.1 per cent of GDP. The increase in current account deficits was due to larger increase in merchandise imports compared to exports.

4) "It appears the last month's transition to GST had affected some export sectors, but that is expected to normalise going ahead," said A. Prasanna, economist at ICICI Securities Primary Dealership. He said he expected the full year current account deficit to be 1.5 per cent of GDP.

5) The foreign currency assets (FCAs), a major component of the overall reserves, increased by $2.568 billion to $376.209 billion for the week (September 8). FCAs include the effect of appreciation or depreciation of non-US dollar currencies, such as the euro, the pound and the yen held in the reserves.

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