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INDIA’S FOREX PRESSURES

forex; foreign

At a time when India needs to strengthen its foreign exchange inflows the most, the reverse has been happening on many fronts. India’s forex reserves have receded by USD 25bn to USD 400bn, primarily because of the outflow of about Rs.66000 crores from the Indian stock markets, by the foreign investors and the huge increase of USD 26 bn in India’s annual oil import bill, due to the rising increase in global crude oil prices. The rupee has weakened considerably and despite that, there has been no major upsurge in India’s exports, which can help to mitigate the impact of a rising dollar on our CAD. In fact, India’s exports have fallen by 3% in September 2018. On the other hand, imports led by a rising demand for oil and the rise in global oil prices, continue to be buoyant. The government has imposed curbs on imports of many non-essential items, by way of additional import duties, expecting to rein in up to USD 8 bn of forex outflows, due to these measures.

Further oil companies like IOCL, HPCL etc. have been permitted to raise forex loans of up to USD 10 bn, to partly provide for the additional foreign exchange, needed to fund India’s burgeoning oil needs, at a time when crude oil prices are northbound. The government is yet to unleash two potent measures in its armoury to combat the receding forex reserves viz. import curbs on gold and to raise dollar loans of upto USD 30 bn from NRIs, to shore up our forex reserves.

India’s present forex pressures are primarily to do with the rising crude oil prices in global markets, which at the moment hover at about USD 80 a barrel. It is expected to go up further. The last time India faced a forex crisis was in 2013 when crude oil touched $ 147 a barrel. The Indian economy, whose macros were fragile then and were not as robust as they are at present, yet weathered it. With a low inflation, rising GDP growth, oil prices below $100 a barrel and forex reserves of USD 400 bn, India is in a strong position to handle the impact of the oil price hike on its fisc. The RBI has done a prudent job in managing the weakening of the Indian rupee and maintaining forex reserves at robust levels. It has refrained from depleting our forex reserves, by selling dollars to artificially prop up the rupee value.

While these are short-term measures to mitigate a crisis, India needs long term measures to improve its forex position, by way of rising exports and FDI inflows. That needs a significant improvement in our national productivity and reforms, not just in land, labour, taxation and administration, but moreso in the financial/banking sector and red tapism and corruption, which continue unabated. India is yet not a durable attractive investment destination, which inspires long term confidence in the minds of foreign investors. Till that is not done, India’s forex inflows will remain a victim of global trends and pressures.

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