How Has India Built Large Forex Reserves Despite Perennial Trade Deficits?

[Riaz Haq]

India's forex reserves of nearly $640 billion are the 4th largest in the world despite the fact that it runs trade deficits year after year.  Other nations among the top 5 with the biggest US dollar reserves are China ($3.4 trillion), Japan ($1.4 trillion) , Switzerland  ($1.1 trillion) and Russia ($623 billion). They have all accomplished this feat by running large trade surpluses for many years. 

History of India's Trade Deficits in billions of US dollars. Source...

So how did India manage to build over $600 billion in US dollar reserves? The top contributor to India's reserves is debt which accounts for 48%. Portfolio equity investments are known as “hot” money or speculative money flows accounted for 23% of India's forex reserves, according to an analysis published by The Hindu BusinessLine. 

While India has accumulated the largest forex reserves in its history, its debt to GDP ratio is also nearing an all-time record of 90%, the highest in the South Asia region. India's debt has risen by 17% of its GDP in the last two years, the most of any emerging economy. By contrast, Pakistan's debt to GDP ratio has increased by a mere 1.6% to 87.2% from 2019 to 2020.

India's Rising Debt. Source: Business Standard

The International Monetary Fund (IMF) has projected the Indian government debt, including that of the center and the states, to rise to a record 90.6% of gross domestic product (GDP) during 2021-22 against 89.6% in the previous year. By contrast,  the percentage of Pakistan's public debt to Gross Domestic Product (GDP) including debt from the International Monetary Fund, and external and domestic debt has fallen from 87.6% in Fiscal Year (FY) 2019-20 to 83.5% in FY 2020-21.    

While large reserves are a source of comfort in terms of balance of payments and currency stability, it also has significant downsides. The biggest risk is the interest rates on the debt (accounting for 48% of India's US$ reserves) which depend heavily on the US Federal Reserve's monetary policy. Should the Fed decide to raise interest rates to tighten money supply amid inflation concerns, the cost of servicing the US dollar denominated debt will rise. 

The second big worry is that the "hot money" accounting for 23% of India's US$ reserves could suddenly decide to leave India for better returns elsewhere. This happened in the Asian Financial Crisis of 1997-98. It began in Thailand and then quickly spread to neighboring economies. Initially, it was a currency crisis when Bangkok unpegged the Thai baht from the U.S. dollar that set off a series of currency devaluations and massive flights of capital. 

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[Riaz Haq]

#India's monthly #trade deficit hit record high of $23.27 billion in November 2021. Going by the current trend, India's trade deficit for the third quarter will hit $65 billion. https://www.cnbctv18.com/economy/explained-why-indias-trade-deficit...

Triggering concern among macroeconomics experts, India's trade deficit was calculated at $23.27 billion for the month of November. This is the highest India's trade deficit has ever reached. The value of imports has remained above $50 billion for three consecutive months now. Going by the current trend, India's trade deficit for the third quarter will hit $65 billion.

As per official data, the imports have gone up by 57 percent (year-on-year) to $53.15 billion. The value of imports has remained above $50 billion for three consecutive months now. The average value of imports used to be in the $40 billion range.
Why the widening trade gap?
The trade deficit of a country increases when the value of its exports fall below the value of its imports. India’s trade deficit has been increasing on the back of its increasingly higher imports, while exports have been lower than expected as well. Imports have increased by 57 percent, year-over-year.
The value of imports has been increasing not due to increased volumes but increased commodity prices, mainly fuel. India, as a net importer of fuel, has been hit hard by the high prices of crude and coal as nations have been struggling to keep abreast of the power crises across the world.

The increase of 132 percent in crude prices has hit Indian imports hard. The rise in prices of other commodities like chemicals, gold, electronics and machinery has also drastically increased India’s import ledger.
At the same time, the tally of exports has also been the lowest since February 2021, even though petroleum products, engineering goods, chemicals and others have performed well.
Why is it bad?
The concerns are well-placed as this is the third consecutive month when India's trade deficit -- the difference between the value of imports and that of exports -- was upwards of $20 billion. A higher trade deficit may weaken the Indian rupee against the dollar.
While a trade deficit is not inherently bad or good, it can have different effects, depending on the economy in context. In India’s context, the simplest cost will be increasingly higher costs of imported goods for consumers while domestic workers also earn less due to a weakened rupee. Depreciation of the rupee can be welcome in the global economic context, but not over the longer term.
Also read: Will RBI use ‘clutch’ and ‘accelerator’ in its upcoming monetary policy?
Continuing trade deficits also eat into the country’s balance of payments (BoP). India’s balance of payments surplus stood at $80 billion.
What lies ahead
Going by the current trend, India's trade deficit for the third quarter will hit the $65-billion mark. Meanwhile, India's exports fell below $30 billion in November. The last time this happened was in February this year. However,oil exports of petroleum products, chemicals, cotton textiles, and electronics have gone up.

[Riaz Haq]

#Indian rupee closes near 18 month-low, ends at 75.52 to #US$ amid #India's soaring #trade deficits. #INR may fall to new record lows as US Federal Reserve withdraws its easy money policy & tightens interest rates. "Hot money" capital flight likely https://www.business-standard.com/article/markets/rupee-closes-at-n...

https://twitter.com/haqsmusings/status/1469375632639287302?s=20

The Indian rupee closed at a nearly 18-month low on Thursday, a day after the Reserve Bank of India (RBI) maintained a status quo on policy rates but tightened excess liquidity from the banking system.

The partially convertible currency closed at 75.52 a dollar, the lowest since July 1, 2020, when it had touched 75.59. The rupee had closed at 75.45 a dollar on Wednesday, the policy day.

According to currency experts, pressure on the rupee would continue; some even said the domestic currency may cross its record low levels as the US Federal Reserve withdraws its easy money policy and move towards tightening of rates.

The rupee touched 76.92 a dollar in the intraday trade on April 22 last year.

“Within six to seven months, the rupee can be expected to move towards 78-plus level as the Fed becomes hawkish to rein in inflation, triggering strengthening of the dollar," said Samir Lodha, managing director of QuantArt.

“The record trade deficit will be an additional sore point for the rupee, while the RBI will ensure there's no currency crisis,” Lodha said.

The dollar index, which measures the dollar’s strength against major currencies, continued to strengthen and rose 0.18 per cent to 96.067.

On an intraday basis, the rupee fell 0.086 per cent even as many Asian peers rose against the dollar. Year to date, the rupee has fallen 3.244 per cent against the dollar. In a recent report, economic research firm QuantEco said that the rupee is likely to lose as it had outperformed its trading partners in the recent past.

The relative outperformance of the rupee in the recent past against other currencies in the region could “increase its overvaluation on a real effective exchange rate (REER) basis to 9.4-9.9 per cent in Nov-21, the strongest level in nearly 4-years,” QuantEco wrote in a report.

“Seen from a historical context, the current negative correlation between the dollar index and USDINR is getting ripe for a reversal. This holds from a REER perspective as well, where historical reversals in overvaluation have got triggered in the 8-12 per cent range,” QuantEco said.

Foreign investors have been net sellers of Indian equities in all trading sessions since November 18, withdrawing almost $5 billion during this period, said Sriram Iyer, senior research analyst at Reliance Securities.

Oil prices have risen for the sixth straight day as the Omicron mutation failed to suppress demand.

“Technically, the USDINR Spot pair immediate hurdle now is at 75.67 levels and a break above will push the pair to 75.83 and ultimately to 76.00 levels," Iyer said, adding, supports are at 75.30 and 75.22 levels.

[Riaz Haq]

Highest #Debt Among Peers Keeps #India Outlook Negative at Fitch. India’s government debt to #GDP ratio was 89.6% in last FY. Higher debt levels may crowd out financing for private sector. #economy #BJP #COVID https://www.bloomberg.com/news/articles/2021-11-17/highest-debt-amo...

https://twitter.com/haqsmusings/status/1469424437766209537?s=20

Highest Debt Among Peers Keeps India Outlook Negative at Fitch
By Rahul Satija +Sign Up
November 16, 2021, 5:24 PM PST
India’s government debt to GDP ratio was 89.6% in last FY
Higher debt levels may crowd out financing for private sector

https://www.bloomberg.com/news/articles/2021-11-17/highest-debt-amo...


Fitch Ratings retained its negative outlook on India’s sovereign rating that’s barely above junk grade, reflecting concern the country will find it challenging to cut its high public debt.

That’s in contrast with Moody’s Investors Service and S&P Global Ratings, which both have a stable outlook on India’s sovereign score. Fitch highlighted that the country’s general government debt at 89.6% of gross domestic product in the financial year ended March 31 is the highest of similar rated emerging-market sovereigns, in a note published late Tuesday.

[Riaz Haq]

Fitch rating agency says #Pakistan #debt headed for ‘positive momentum’. The agency had predicted a “stable outlook” in May 2021 for Pakistan’s debt. #economy https://www.laprensalatina.com/rating-agency-says-pakistan-debt-hea...

Islamabad, Nov 24 (EFE).- International credit rating agency Fitch has affirmed that Pakistan’s policy adjustments and access to external financing could create positive momentum for the debt of the country.

The agency had predicted a “stable outlook” in May 2021 for Pakistan’s debt.

“Ongoing reforms, if sustained, could create positive momentum for the sovereign’s ‘B-’ rating,” Fitch said in a report.

It noted that Saudi Arabian had supported Pakistan’s near-term financing efforts to place $3 billion on deposit with the State Bank of Pakistan.

The kingdom would provide an additional $1.2 billion oil-financing facility under a one-year support package.

Pakistan’s foreign reserves also received a $2.8 billion boost in August from the IMF’s one-off global allocation of Special Drawing Rights.

On Nov.21, the IMF and Pakistan reached a consensus on the $6 billion financial assistance agreement of 2019. Fitch expects the fund to release $1 billion from the pact.

It is the third financial program that the IMF grants to the Asian nation.

“If the government retains its commitment to a market-driven exchange rate, we believe this would be a useful shock absorber to help contain external risks in the longer term,” it said.

An exchange rate that supports the price competitiveness of Pakistan’s exports could over time help to reduce the country’s reliance on debt financing to balance its external accounts, which remains a credit weakness.

In addition, fiscal consolidation under the EFF could help reduce external imbalances by dampening imports, while also reducing the drag of weak public finances on Pakistan’s rating.

The situation is a repetition of the previous elections of 2013, when two months after the inauguration of the new government the IMF announced a package of aid of $5.3 billion to reactivate its weakened economy.

Pakistan finished repaying that aid package in October last year, the first time that the country had fully repaid an IMF loan. EFE

[Riaz Haq]

Funds Shun #India Turning #India #Rupee Into EM Asia’s Worst Currency. #INR declined 1.9% this quarter as global funds pulled $4.2 billion of capital out of India’s #StockMarket, the most among regional markets where data is available. #Modi #BJP #Hindutva https://www.bloomberg.com/news/articles/2021-12-21/global-funds-shu...

Rupee may fall to 76.50 by end-March: Bloomberg survey
Rupee declines 1.9% this quarter, worst in emerging Asia

The Indian rupee is set to end a tumultuous year as Asia’s worst-performing emerging market currency with foreign funds fleeing the nation’s stocks.

The currency declined 1.9% this quarter as global funds pulled $4.2 billion of capital out of the country’s stock market, the most among regional markets where data is available.

[Riaz Haq]

#India's #forex #reserves slide for fourth straight week amid decline in currency assets.Falling forex reserves may cause issues for #Modi government and the Reserve Bank in managing the nation’s external and internal financial issues. https://indianexpress.com/article/business/market/forex-reserves-sl... via @IndianExpress

Recording a fall of $160 million, the nation’s forex reserves declined to $635.667 billion during the week to December 17, according to data from the RBI.

For the previous week ended December 10, the foreign exchange — or forex — reserves had fallen by $77 million to $635.828 billion. The forex kitty had reached an all-time high of $642.453 billion during the week ended September 3, 2021.

For the reporting week ended December 17, the decline was mainly due to a fall in foreign currency assets (FCAs), a vital component of the overall reserves. This is the fourth straight week of fall in the reserves.

FCAs tumbled by $645 million to $572.216 billion, weekly data released by the Reserve Bank of India (RBI) showed on Friday.

Expressed in dollar terms, the FCA include the effect of appreciation or depreciation of non-US units such as the euro, pound sterling and Japanese yen held in the foreign exchange reserves.

Gold reserves rose by $475 million to $39.183 billion in the reporting week.

The special drawing rights (SDRs) with the International Monetary Fund (IMF) remained unchanged at $19.089 billion.

The country’s reserve position with the IMF increased by $9 million to $5.179 billion in the reporting week, as per the data.

Falling forex reserves may cause issues for the government and the Reserve Bank in managing the nation’s external and internal financial issues.

Higher reserves are a big cushion in the event of any crisis on the economic front and enough to cover the import bill of the country for a year. They also strengthen the rupee against the US dollar.

An increase in reserves also provide a level of confidence to markets that a nation can meet its external obligations, demonstrate the backing of domestic currency by external assets, assist the government in meeting its forex needs and external debt obligations, and maintain a reserve for national disasters or emergencies.

The Reserve Bank functions as the custodian and manager of forex reserves, and operates within the overall policy framework agreed upon with the government. It allocates the dollars for specific purposes.

For example, under the Liberalised Remittances Scheme, individuals are allowed to remit up to $250,000 every year. The RBI uses its forex kitty for the orderly movement of the rupee. It sells the dollar when the rupee weakens and buys the dollar when the rupee strengthens. WITH PTI

[Riaz Haq]

#India’s current account deficit grows as #trade gap widens in Q3. Net foreign portfolio #investment fell to $3.9 billion from $7 billion a year ago; net #FDI inflows at $9.5 billion, down from $24.4 billion a year ago.#Modi #BJP #Hindutva #Islamophobia

https://www.bloomberg.com/news/articles/2021-12-31/india-s-current-...

India’s current-account balance slipped back into a deficit last quarter as the nation’s trade gap widened.

The current account, the broadest measure of the country’s overseas trade and services flows, was in a deficit of $9.6 billion, or 1.3% of gross domestic product, in the three months ended September, the Reserve Bank of India said in a statement on Friday. The median in a Bloomberg survey of 12 economists was for a deficit of $10.9 billion.

The account was in a surplus of $6.6 billion in the April to June period, and also a surplus of $15.3 billion, or 2.4% of GDP, in the comparable year-ago period.

Digging Deeper
The latest numbers come on the back of a surge in global crude oil prices which inflated India’s import bill; the RBI cited widening of trade deficit to $44.4 billion from $30.7 billion in the preceding quarter and an increase in net outgo of investment income for the current-account gap
Income from services decreased sequentially, but increased on a year-on-year basis on robust performance of computer and business services, the central bank added
Friday’s data, which covers a period when economic activity in India was picking up after a second wave of Covid-19 infections, saw private transfer receipts, mainly representing remittances by Indians employed overseas, rise 3.7% from a year ago to $21.1 billion
Net foreign portfolio investment was $3.9 billion as compared with $7 billion a year ago; net foreign direct investment inflows amounted to $9.5 billion, lower than $24.4 billion a year ago

[Riaz Haq]

#India to borrow $200.7 billion to finance #deficit in $530 billion budget. A #Mumbai trader said India government #bonds are facing a double whammy. Without any support, the yields (#interestrates) are set to jump to 6.95% to 7% in coming days. #COVID https://finance.yahoo.com/news/bonds-tumble-india-record-government...

India’s benchmark bond yields surged to the highest in two and a half years after the government unveiled plans to issue record amount of bonds in the next financial year.

The selloff was exacerbated as the annual budget announcement lacked widely expected measures to facilitate inclusion of the nation’s debt into global bond indexes. Elevated bond sales will worsen debt supply worries in a year when the Reserve Bank of India is expected to wind back on its monetary stimulus.

“India government bonds are facing a double whammy,” said Harish Agarwal a bond trader at FirstRand Bank in Mumbai. “Without any support, the yields are set to jump to 6.95% to 7% in the coming days.”

The yield on the benchmark 10-year bond rose as much as 21 basis points to 6.89%, the highest since July 2019. The rupee fell 0.2% to 74.74 per dollar.

The government’s gross borrowing is estimated at about 15 trillion rupees ($200.7 billion) in the fiscal year starting April, according to the budget documents, much higher than 13 trillion rupees forecast in a Bloomberg survey. The target for the current year is 12.06 trillion rupees. Net borrowing, excluding maturities for next year, is estimated at 11.2 trillion rupees.

The administration also plans to issue sovereign green bonds for the first time as part its market borrowing in 2022-23, Finance Minister Nirmala Sitharaman said in her budget speech on Tuesday. The proceeds will be deployed in public sector projects which will help in reducing the carbon intensity of the economy, she said.

Bond yields have climbed more than 40 basis points in 2022 as the RBI ramps up its liquidity withdrawal in an effort to gradually normalize policy and amid rising global yields. The central bank has also stopped its bond purchases and banks, the biggest buyers are already overstocked, resulting in a demand-supply imbalance.

[Riaz Haq]

Chitra Ramkrishna, #India's $4 trillion #StockMarket #NSE CEO, let a faceless #Hindu conman ‘yogi’ make all key decisions. For all this, SEBI’s punishment to Ramkrishna is paltry. She has now been barred from capital markets for three years. #Modi #BJP https://www.thehindubusinessline.com/markets/stock-markets/inside-t...

Ramkrishna referred to the unknown yogi as “Sironmani” [the exalted one] and shared with him information such as NSE’s five year projections, financial data, dividend ratio, business plans, agenda of board meeting, and even consulted him on employee performance appraisals.

Ramkrishna was ousted from NSE in 2016 for her role in the co-location and algo trading scam and abuse of power in the appointment of Subramanian. The probe found that Ramkrishna ran NSE with impunity. No one from the senior management, board, or the promoters — which include big government institutions and banks — ever objected to her ways. Instead, Ramkrishna was given ₹44 crore as pending dues and salary when she left NSE.

SEBI’s probe revealed that Ramkrishna communicated with the yogi, whom she had never met, over email, for almost 20 years and he guided her to appoint Subramanian as the second in command at NSE. “Their spiritual powers do not require them to have any such physical coordinates and would manifest at will,” Ramkrishna told SEBI. The contents of the email were not denied by her.

On January 18, 2013, Subramanian was offered the role of Chief Strategic Advisor at NSE for an annual compensation of ₹1.68 crore against his last drawn salary (as per his claim) of ₹15 lakh at Balmer Lawrie. In March 2014, Ramkrishna approved a 20 per cent increment to Subramanian and his salary was revised to ₹2.01 crore. Five weeks thereafter, Subramanian’s salary was again revised upwards by 15 per cent to ₹2.31 crore as Ramkrishna dubbed his performance to be A+ (exceptional). By 2015, his cost-to-company had zoomed to ₹5 crore, he was given a cabin next to Ramkrishna and granted first-class international air travel. All this was in accordance with the yogi’s instructions.

An email from the unknown yogi even carried the diktat that Subramanian be exempt from the contractual 5-day work week and instead be asked to come only for three days and allowed to work the rest of the time at will.

Another email on September 5, 2015, from the yogi told Ramkrishna, “SOM, if I had the opportunity to be a person on Earth then Kanchan is the perfect fit. Ashirvadhams.” On December 30, 2015, Ramkrishna told the Yogi in her reply, “SIRONMANI, struggle is I have always seen THEE through G, and challenged myself to on my own realise the difference.” ‘SOM’ refers to Ramkrishna, and ‘Kanchan’ and ‘G’ refer to Subramanian, the SEBI probe revealed.

These findings were confirmed by Dinesh Kanabar, the then Chairman of NSE nomination and remuneration committee. Subramanian had all the powers of the MD and CEO, and was flying first class, but remained a consultant on paper. SEBI had observed that there was a glaring conspiracy of a money making scheme involving NSE’s boss with the unknown person.

An email dated February 18, 2015, from Ramkrishna to the unknown yogi, reads, “The role and designation of Group Chief Coordination Officer is fine and we could take that forward. I have a small submission, can we make this as Group President and Chief Coordination Officer? And over a time frame as you direct we can move the entire operations of the exchange under G and redesignate him as Chief Operating Officer? Seek Your guidance on the path forward on this Swami If this meets with your Highness’ approval, then parallelly could we coin JR (Ravi) as Group President Finance and stakeholder relations and Corporate General Counsel?”

[Riaz Haq]

#Mumbai #FII Exodus: Foreign investors selling #Indian shares at a rate of $1 billion a day as #India's stocks plummet. Pace picks up after a record $2.9 billion withdrawn last week. #Modi #BJP #Hindutva #economy #Russia #Ukraine https://www.bloomberg.com/news/articles/2022-03-10/a-billion-dollar...

India’s $3.2 trillion stock market is witnessing an unprecedented foreign selloff as the surge in oil prices fuels worries of an inflation shock in the major energy-importing nation.

While global funds have been net sellers of local equities since the start of October, when the benchmark S&P BSE Sensex hit an all-time high, the pace of outflows has intensified since the start of the war in Ukraine. India relies on imports to meet about 85% of its oil needs.