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Fluctuation in the value of forex assets has a significant impact on India’s foreign exchange reserves. The country’s foreign exchange reserves fell by $10.4 billion to $294.3 billion during 2011-12, after rising by $25.8 billion in 2010-11 and $27.1 billion in 2009-10, according to RBI data.
Analysis shows that change in the value of foreign currency and gold accounted for 23.1 per cent of the variation in the total forex reserves in 2011-12. In contrast, 49.2 per cent of the variation in 2010-11 and 50.2 per cent in 2009-10 was caused by an increase in the valuation of the country’s foreign exchange reserves.
The country’s reserves of foreign exchange comprise currencies such as the US dollar, Japanese yen, British pound and euro, besides gold and special drawing rights (SDRs) from the International Monetary Fund.
In FY-12, the yen fell by 0.3 per cent, the pound by 0.1 per cent and the euro by 5.7 per cent against the US dollar. But, the 16.5 per cent increase in the price of gold against the dollar tempered the valuation losses.
Holding in gold
The spectacular rally in gold did not impact the forex reserves significantly since India’s holding in gold is only one-tenth of the foreign currency holding. As of March 30, 2012, the value of gold in India’s foreign exchange reserve holdings stood at $27 billion, while reserves in foreign currency amounted to $260 billion. At the end of the previous fiscal, gold reserves were valued at $22.1 billion and foreign currency reserves at $273.7 billion.
The valuation gain of $2.4 billion in 2011-12 can be attributed to the rise in gold prices. In the previous year, the valuation gain in foreign reserves accounted for $12.7 billion.
On a balance of payments (BoP) basis, excluding valuation changes, India’s foreign exchange reserves fell by $12.8 billion last fiscal, as against a gain of $13.1 billion in 2010-11.
In terms of the sources of variation responsible for the decline in forex reserves, expansion in the country’s capital account inflows was not sufficient to make up for the country’s current account deficit. While India’s net capital account inflows grew by 10.8 per cent to $65.4 billion, the CAD widened by 70.4 per cent to $78.2 billion vis-a-vis the previous year.
Capital inflows
In terms of the capital account flows, net foreign investment witnessed a 1.25 per cent decline in 2011-12. This was primarily due to the shrinkage of portfolio investments by 43.2 per cent, even though foreign direct investment more than doubled. The value of Indian companies’ American and Global Depository Receipts also plummeted by 70 per cent during the period.
One positive was that India’s external commercial borrowings dipped by 17.6 per cent during the period, while foreign currency assets held by banks grew over two-fold. In particular, NRI deposits in Indian banks shot up nearly four-fold, enthused by steps taken to improve the interest rates on these accounts. Short-term trade credit declined by 39 per cent, while external assistance to India also dipped by 53 per cent.
arvind.jayaram@thehindu.co.in
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