India Foreign Exchange Reserves in Four Charts
(Please check a comprehensive Update 10Nov2023 on adequacy of foreign exchange reserves)
(Updates 05Nov2023 and 31Jan2023 are available with new data and charts)
Reserve Bank of India, India's central bank, has been accumulating its foreign exchange reserves since 2013, when rupee exchange rate fluctuated very wildly causing macro economic instability in India.
In the past seven and a half years, RBI's forex reserves have increased from USD 275 billion (Rs 17.2 lakh crore at the then exchange rate) in September 2013 to USD 630 billion (Rs 47.6 lakh crore at the current exchange rate) as of February 2022.
Absolute numbers are mostly meaningless. All aggregate data points are to be seen with reference to another data point in order to compare numbers for different time periods. Like an expanding universe, most economies grow in size all the time. So are the economic data points--growing in size always.
India's foreign exchange reserves were hardly USD 25 billion 25 years back. Now, they have grown to a little more than USD 630 billion. With a growing economy, forex reserves have grown substantially--may be, we're holding excess costing us serious money.
The adequacy of a country's forex reserves has been debated for many years. The traditional measure of adequacy was number of months of import cover the reserves can support. This measure has been outdated as the size and complexity of Indian economy has grown substantially.
Now countries use more sophisticated measures to get a grip on reserves adequacy. Here, let me tell you an anecdote. Back in the late 1990s, Nelson Mandela (then-South Africa president) wrote to a money manager asking how South Africa should deal with currency speculation.
The money manager wrote back saying it was always futile to defend any indefensible exchange rates and instead urged the South African leader to avoid excessive short-term external debt and to maintain stringent supervision over local banks.
The money manager who advised thus was none other than speculator-cum-philanthropist George Soros. (source: "Soros: The Life and Times of A Messianic Billionaire” by Michael T. Kaufman)
The most important measure to gauge reserves adequacy is short-term debt (that is, external debt with an original maturity of one year) to forex reserves. Others include: short-term external debt to GDP, external debt to current a/c receipts and reserves to GDP ratio.
The composition of reserves and their risk profiles also matter. Flows via foreign direct investment (FDI) route are considered more stable, while flows from foreign portfolio investment (FPI) are considered volatile and hot.
Short-term external debt is also considered as a volatile capital flow. The soft underbelly of India's forex reserves is the preponderance of volatile portfolio flows (FPI flows into stock / debt markets). If and when FPIs turn negative, India's reserves become vulnerable.
In contrast to India, China's forex reserves are mainly from its trade surplus (excess of exports over imports). India has consistently lagged behind in export competitiveness--especially in manufacturing exports. China's forex reserves, world's largest, are USD 3.21 trillion--their peak was USD 4 trillion (2014).
India Forex Reserves in Four Charts
Let us visualise RBI's forex reserves in four charts (please click on images for a better view):
1) Import cover is number of months of imports forex reserves could pay for. As per latest available figures (June 2021), India's forex reserves are sufficient to cover for 15.8 months of imports. By this metric, we have excess of reserves.
2) Ratio of short-term foreign debt to total forex reserves: As per latest available figures (June 2021), the percentage of short-term foreign debt to forex reserves is just 16.80 per cent--reflecting India's comfortable position of forex reserves. The lower the ratio, the better it is from a macro economic stability viewpoint.
Short-term foreign debt includes, external debt liabilities of the banking system, investment in government Treasury bills by foreign central banks, international institutions and foreign portfolio investors (FPIs), suppliers' credit upto 180 days, etc.
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3) Ratio of Volatile Capital Flows to Forex Reserves: As per latest available data (June 2021), the percentage of volatile cash flows to total forex reserves is 65.5 per cent, showing a decline since September 2013. The lower the ratio, the better from India's macro economy perspective.
However, foreign investors (FPIs) have lately been selling Indian stocks and bonds. Since July 2021, FPIs' selling of stocks and bonds combined amounts to Rs 108,400 crore (or USD 14.3 billion) till yesterday.
The relentless selling especially since October 2021 by FPIs has put pressure on rupee exchange rate--India rupee against the US dollar depreciated from 74 at the end of June 2021 to 77 now. Of course, Russia's invasion of Ukraine and the prospect of the US Federal Reserve raising interest rates and Fed tapering of its bond holdings have pressured emerging markets' currencies, including Indian rupee.
Volatile capital flows include cumulative portfolio inflows and outstanding short-term debt.
4) Bonus graph: RBI Forex Reserves Earnings Rate: As the golbal bond yields have consitently fallen from their peak four decades ago, the return from RBI's forex reserves too has fallen over the years. The return touched a low of 0.80 per cent in FY 2016-17 and for the latest FY 2020-21, the return improved to 2.10 per cent.
It may be mentioned that the financial year for RBI used to be from July to June every year till FY 2019-20. However, RBI changed its financial year to April-March, in line with Government of India fiscal year and Corporate India financial year.
FY 2020-21 (transition year) return figure given here is from July 2020 to March 2021--just for nine months.
That's all folks--as they say, a graph is worth more than a 1,000 words!
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P.S.: After writing the blog, the following updates are added with new information / images:
Update 05Nov2023: Graph and table showing RBI Forex Reserves Earnings rate - data added for recent years >
RBI's rate of earnings on its foreign currency assets (FCA are part of forex reserves) jumped to 3.73 percent in FY 2022-23 from 2.11 percent in 2021-22 as short term interest rates in the US and Europe surged after the Fed, BoE and ECB started raising interest rates in March 2022 >
Update 31Jan2023: Graph and table showing RBI Forex Reserves Earnings rate - data added for recent years >
RBI's rate of earnings on its forex reserves is stagnant for two years > it was at 2.10% and 2.11% for FY 2020-21 and 2021-22 respectively >
References:
Tweet thread 17Jan2021
Tweet thread 15Sep2020
RBI Half-yearly Report on Forex Reserves 2021
RBI Half-yearly Report on Forex Reserves 2020
RBI Weekly Supplement 04Mar2022
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Disclosure: I've vested interested in Indian stocks and other investments. It's safe to assume I've interest in the financial instruments / products discussed, if any.
Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets.
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