India’s Foreign Exchange Reserve Concerns

India’s foreign exchange reserves have fallen by over $52 billion as foreign portfolio investors have moved nearly $40 billion out of India during the last eight months. The trend is not favourable for India’s economic prosperity considering the fall of rupee and the rise of export bills. Citing the example of neighbouring Sri Lanka, many economists have urged the government to take necessary steps to prevent the country from becoming a defaulter. On the other hand, another section of experts have completely ruled out the possibility of India facing a crisis like the island nation by arguing that the country’s financial foundation is much stronger than any neighbouring countries and that the shrinking foreign exchange reserve is nothing but a temporary phenomenon. They claim that the current crisis is a result of the present global scenario which is undergoing a very challenging phase due to the COVID-19 pandemic, followed by Russia-Ukraine war. They are hopeful that once these problems pass over, foreign investors will once again start investing in stocks and bonds and the Indian economy will be revived to its former glory.

The present financial position of the country as per data released by the Ministry of Finance, is that India’s foreign debt stood at $620 billion in March last, which was nearly 21 per cent of the GDP and in the ongoing fiscal, the country has to repay nearly $267 billion in instalments. Going simply by the figures, the situation may look troublesome as half of the country’s foreign exchange reserve will go just to repay a small part of foreign loans. It may appear that there will be no money in the state’s exchequer to meet any emergency requirements, thus putting the country on the verge of severe balance of payment (BoP) crisis, as well as huge current account deficit. But the reality is something different as the amount of foreign debt includes both the government and the private sectors. As per records, the government’s share in the current foreign debt is only 21 per cent and in the ongoing fiscal the government has to repay only three per cent of the total instalment payable. So, those predicting hard days for the Indian economy in the near future, have not done their homework thoroughly.

However, the government should not show any complacency in dealing with the present situation. The government will first have to take calculated steps to maintain a healthy foreign exchange reserve in-order to meet any eventuality. Secondly, the government should not allow the private sector to make a dent in the country’s forex reserve for repayment of loans. Thirdly, as the trade deficit has increased considerably during the last two to three months, the government should initiate steps to discourage imports. The need of the hour is to save as much foreign exchange reserve as possible to keep the country’s economy on track even in troubled days to come.