India’s foreign exchange reserves crossed half a trillion dollars during the first week of June. In an otherwise negative economic environment, country’s healthy forex reserves act as strong mitigants for potential macro-economic risks. India now ranks fifth in the list of countries with highest foreign exchange reserves behind China, Japan, Switzerland and Russia.
|Country||Foreign Exchange Reserves in India (million USD)|
Half a trillion figure, though not a destination in itself, is nonetheless a good milestone to cross in India’s journey towards becoming an advanced economy. The journey so far has been an interesting one. India had USD 2.16 Billion worth of foreign reserves as on March 1951, which it could barely double over the next forty years (foreign exchange reserves were USD 3.96 Billion as on March 1990).
India started facing acute shortage of foreign currency assets by the middle of year 1990 – this was a result of large twin deficits which the country was running. The crisis forced the central bank and government to initiate a sequence of steps.
- Even though India had a shortage of foreign currency assets, the gold stock was adequate. However, RBI used to value the gold holdings at purchase price and not at market value. In October 1990, government passed an ordinance (later passed by parliament as well) to revalue the gold holdings at market price. In the annexure a sharp jump in gold holdings can be noticed for the year 1990-91.
- The foreign currency assets however continued to deplete and by end of year 1990 were bare enough to cover just three weeks of imports. Further, during mid-1991 government had large repayments due for its massive USD 75 Billion plus foreign debt. To service this, government in April 1991 decided to sell twenty tonnes of gold previously confiscated from smugglers. The sale took place in May and was an interesting transaction done via State Bank of India. As part of the transaction SBI entered into a sale and repurchase agreement with Zurich based Union bank of Switzerland to raise more than 400 Cr worth of foreign currency at a pricing of LIBOR plus 633 bps.
- However, the above amount raised still was not sufficient. RBI, thereafter, decided to pledge its own gold holding to raise foreign currency debt. Inspite of India being a depository country under the IMF, lenders insisted that the pledged gold be kept outside the country. To comply with the same around 47 tonnes of gold was airlifted from Mumbai. As ex RBI Governor C. Rangarajan narrated later on, the entire episode was not without its share of drama. For example, when any commodity is sent out of the country, the nature of the commodity has to be declared. He spoke with the commissioner of customs and a special authorisation from the finance ministry was obtained to send the gold without such a declaration. As one of the consignments had an intermediate stopover, a sudden doubt arose whether this was covered by insurance. On a Sunday, he had the office opened to check the policy and was relieved to find that it had a “Vault to Vault” insurance cover. Finally, when the gold was moved from the vault of the Bombay office to the airport, the movement along the road was closely monitored. In the case of one large consignment, the bullion van had to stop because of a tyre burst in one of the cars in the convoy. Fortunately, before much commotion could happen, the convoy resumed.
- The emergency loan received and the reforms implemented gradually eased the foreign exchange pressures for the country and India repaid the entire emergency loan it took in November of 1991 itself.
The crisis highlighted the importance of prudent foreign reserve management and as India emerged stronger post the reforms, it actively started accumulating these reserves. Fast forward today, India has increased the reserves from USD 3.9 Billion to USD 501.7 Billion in a span of just thirty years.
The year on year movement of India’s foreign reserves for the past seven decades is highlighted below
India’s foreign reserves cover with respect to annual imports and total external debt is also very healthy as depicted below
Annexure : Year on year movement of foreign currency assets for the past seven decades.
|End of Financial Year||Foreign Currency Assets||Gold||Reserve Tranche Position||SDRs||Total|