The forex chest’s valuation swell

India’s foreign exchange reserves, at a sizeable $699.9 billion as of October 3, represent a healthy level, according to adequacy yardsticks such as import cover and external debt servicing requirements.

- DHARMAKIRTI JOSHI, ADHISH VERMA & MEERA MOHAN

In times of lingering geopolitical uncertainties and market volatility, that fourth-biggest hoard in the world is a bulwark. The country’s current account deficit (CAD) remains comfortable as well, coming in at 0.2 per cent of gross domestic product (GDP) in the first quarter of the financial year.

But when capital flows are volatile, as has happened this financial year, even financing a low CAD can become challenging and put pressure on the currency. In the first half, for instance, foreign portfolio investment (FPI) recorded a net outflow of $3.9 billion, as opposed to a net inflow of $21.6 billion in the year-ago period.

Evolution of reserve management

Efficient forex management is crucial to ensure a reasonable level of confidence in the international financial and trading communities about the capacity of a country to honour its obligations and maintain trade and financial flows while minimising the liquidity risk.

India has come a long way both in terms of the quantum of reserves and the management practices thereof. Today, foreign exchange reserves account for nearly 17 per cent of India’s GDP, compared with just 1.3 per cent in FY91 during the balance of payments crisis.