An Analysis of Forex Reserves in India since 2000- 2021 � &�FR impact on trade, external debt and macroeconomic variable

By :- Gautam kumar

Structure of the assignment

• Introduction Of the Topic
• Background of the story
• Why tis is important
• objective of the study

​

• Review of literature
• Review 1
• Review 2
• DATA
• Methodology & Result

(explain in next slide)

• Correlation analysis
• Correlation matrix

​

• Regression analysis
• Analysis
• Summary report

​

• Conclusion
• References

​

Structure of the assignment

Introduction

• Before the starting of presentation you should know about Forex.
• In simplest terms foreign exchange reserves are the foreign currencies which are held by the central bank to support liabilities on the issued currency and also a way to influence the monetary policies of the country. It includes government securities, bonds, bank notes, bank deposits and treasury bills. Regardless of the size of the economy almost all countries in the economy hold significant foreign exchange reserves and most of them being held in U.S dollars which is the most traded currency. Other currencies in reserves are British pound sterling, euro, Chinese Yuan, and Japanese Yen. Theorists believe that holding reserves in currencies which is not immediately connected to its own is best policy.
• The holding of forex is used to back the one’s domestic currency. Countries who wish to have fixed exchange rate uses forex reserves as a tool of monetary policy. Central institution has ability to exert some control over exchange rates by retaining the option to shove reserves from another currency in to the market.

_{Background of the story:-}

_{Why this is important :-}�

• To main purpose of the assignment is analysis the trend of India forex reserve since 2000 to 2021.
• This is important for study because forex reserve a major component for economic growth.
• Every country in world need foreign exchange for the trade and various other purposes.
• Foreign exchange play major role in Indian economy like RBI use foreign exchange for monetary policy, paying interest of external debt.
• Foreign exchange reserve also play major role in import. Know that india a major importer country (like crude oil, gold, gas, etc) and without foreign reserve we could not import Goods.
• That’s why we can know about the forex & foreign exchange reserve of the country.

Objectives of the study :-

• The main objective the study are know about India foreign exchange reserve, their sources and its important for economic.
• To understand the theoretical framework of forex reserves and their significance in the economic development.
• To statistically analyze the trends in the Forex Reserves of India. And its impact on Trade, Eternal Debt etc.
• To understand how & why forex reserve impact by import & export of the country.
• Statistically analzye India forex reserve and India external debt

​

​

Review of literature �

• Review 1 :-
• (Saba Abid , Neelam Jhawar, 2017) have published a research “An Analysis of Foreign Exchange Reserves in India since 2001- 2016” in IOSR Journal of Economics and Finance (IOSR-JEF).

The analysis of the data reveals that foreign exchange reserves have significantly changed over the years. Total reserves have increased from 13610 billion to 21376 billion, which show an increase of 57%. Gold reserves have fallen to 1192 billion and have a share of 5.5% in total reserves in 2015. Reserve tranche position has also fallen to 81 billion and has a share of .37% in total reserves. Special drawing rights stands at 249 billion with a percentage share of 1.16%. foreign currency reserves stands at 19855 billion with a percentage share of 92.88%, which shows that it is foreign currency reserves that are backing our foreign exchange reserves. Foreign currency reserve is the only component that has shown an increase in our period of study. Two factors which can be stated as responsible factors for increasing reserves are capital inflows and low current account deficit.

Review 2 :-�

(Rajib Das and Siddhartha Nath, 2014 – 2015) have published a research on “Assessing the Reserve Adequacy in India” in Reserve Bank of India Occasional Papers. That’s research and analysis conclude on

• This paper assessed the adequacy of foreign exchange reserves in India using different approaches. First, it observed that reserves in India are significantly higher than the levels in some other major economies with similar external sector characteristics. Second, an econometric analysis revealed that India’s actual reserve levels were within the adequacy band of 2 SD around the predictions from an estimated reserve demand equation. Finally, it calibrated a model for India based on Jeanne and Ranciere (2009, 2011) for optimum reserves’ demand under a Lehman type and an extreme stress scenario to suggest that actual reserves in India remained sufficiently higher to cover that stress. There were instances when actual reserves in India fell below adequate reserves as suggested by econometric models, but not by optimization models. It also observed that the econometrics model tends to suggest a somewhat higher level of optimal reserves for earlier years (2003-12), but both estimates tend to converge for the more recent years. Although, India’s current reserve levels are adequate, it is important to examine the availability of various other foreign currency asset substitutes such as sovereign wealth funds, currency swaps and IMF’s contingency funds to augment its foreign exchange reserves position. As India has limited access to such asset lines beyond its currency swap agreements of US$ 50 billion with Japan a sufficient reserves buffer may be necessary to ensure against any perceived risk as also to ensure the stability of its external sector.

DATA�

• Data for the study is collected from Secondary sources. The study is based on published sources of data collected from journals, magazines, websites likes www.rbi.org.in,Central Statistical Organization (CSO), Handbook of Statistics on the Indian economy were used.
• In our assignment we can take & use data of India Forex Reserve from 2000 to 2021 through various source for analysis.
• We can collect quantitative data for assignment. Then We can change quantitative data into qualitative data
• By Clean up the Table and use a certain time period of data range.

Methodology

&

Results

Foreign exchange reserve or Forex�

• Foreign exchange reserves are assets held on reserve by a Central bank in foreign currencies. These reserves are used to back liabilities and influence monetary policy. It includes any foreign money held by a central bank, such as the Reserve Bank of India.
• Foreign exchange reserves are assets held on reserve by a central bank in foreign currencies, which can include bonds, treasury bills and other government securities.�
• It needs to be noted that most foreign exchange reserves are held in U.S. dollars.
• These assets serve many purposes but are most significantly held to ensure that the central bank has backup funds if the national currency rapidly devalues or becomes altogether insolvent

Sources of Foreign exchange

 Two sources of supply of foreign exchange are:�(i) Export of goods and services from domestic country to foreign country.�(ii) Foreign direct investment.

FDI

A foreign direct investment (FDI) is a purchase of an interest in a company by a company or an investor located outside its borders.

​

Graphical Analysis of FDI inflow In

India Since 2000 to 2021

​

Source:- RBI Report

Components Of Foreign Exchange Reserve

• Foreign Currency Assets
• Gold reserves
• Special Drawing Rights
• Reserve position with the International monetary Fund(IMF)
• Foreign Currency Assets (FCA)
• FCAs are assets that are valued based on a currency other than the country's own currency.
• FCA is the largest component of the forex reserve. It is expressed in dollar terms.
• The FCAs include the effect of appreciation or depreciation of non-US units like the euro, pound and yen held in the foreign exchange reserves.

​

Special drawing rights (SDR)�

• The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves.
• The SDR is neither a currency nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. SDRs can be exchanged for these currencies.
• The value of the SDR is calculated from a weighted basket of major currencies, including the U.S. dollar, the euro, Japanese yen, Chinese yuan, and British pound.
• The interest rate on SDRs or (SDRi) is the interest paid to members on their SDR holdings.

​

Gold reserve�

• A gold reserve is the gold held by a national central bank, intended mainly as a guarantee to redeem promises to pay depositors, note holders (e.g. paper money), or trading peers, during the eras of the gold standard, and also as a store of value, or to support the value of the national currency.

​

• The gold reserves of Reserve Bank of India (RBI), India’s central bank stood at 705.6 tonnes as on June 30. The gold reserves were at 558.1 tonnes in the beginning of 2018

​

• Reserve Tranche Position

International Monetary fund is financed by member’s quota. Each member of the IMF is assigned a quota part of which is payable in SDR’s or specified useable currencies (Reserve Assets) and part in member’s own currency.

• The difference between a member’s quota and the IMF’s holding of its currency is a country’s Reserve Tranche Position (RTP). The reserve tranche position of the quota can be accessed by the member at any time, whereas the rest of the member’s is typically inaccessible.
• A reserve tranche position implies a portion of the required quota of currency each member country must provide to the International Monetary Fund (IMF) that can be utilized for its own purposes.
• The reserve tranche is basically an emergency account that IMF members can access at any time without agreeing to conditions or paying a service fee

Importance Of Foreign Exchange Reserves

According to a report by Goldman Sachs, stronger foreign currency reserves will allow developing market central banks to “buffer their currencies against sharp declines by supplying dollars to the market” at times of volatility.

​

• Foreign exchange reserves increases the confidence in the monetary policies as well as exchange rate policies of the government. The capacity of the central bank to intervene in foreign exchange market and to control any adverse movement is enhanced.
• Also the capacity to stabilize the forex rates to provide more favourable economic environment for the country is also enhanced. During the crises forex reserves come to the rescue of any country and absorb the distress or shocks.
• Domestic currency gets backed by external assets and is good for equity market since the forex reserves are strong then people from different countries wants to invest in the country.

Importance of Increasing Foreign Exchange Reserves

• The government is in a comfortable position if there are rising forex reserves and the RBI in managing India’s external and internal financial issues at a time of major contraction (23.9%) in economic growth.
• It Assist the government in meeting its foreign exchange needs and external debt obligations.

​

• Appreciation in Rupee – The rising foreign exchange reserves has helped the rupee to strengthen against the dollar.
• Crisis Management: Rising Forex Reserve serves as a cushion in the event of a Balance of Payment crisis on the economic front. It is enough to cover the import bill of the country for a year.
• Confidence in the Market: Forex Reserves will provide a level of confidence to markets and investors that a country can meet its external obligations.

​

• Statistical Analysis Of Trends In Forex Reserves In India

Forex Reserve of India

Source : RBI Annual Report

Table :- 1

Source : RBI Annual Report

Source : RBI Annual Report

Source : RBI Annual Report

Source : RBI Annual Report

Source : RBI Annual Report

Forex and trade�

• Forex:- Foreign exchange (Forex or FX) is the conversion of one currency into another at a specific rate known as the foreign exchange rate. The conversion rates for almost all currencies are constantly floating as they are driven by the market forces of Supply and Demand. The laws of supply and demand are microeconomic concepts that state that in efficient markets, the quantity supplied of a good and quantity
• TRADE:- Trade involves the transfer of goods or services from one person or entity to another, often in exchange for money. Economists refer to a system or network that allows trade as a market.

Impact on Exchange Rates

• Foreign currency reserves impact exchange rates when they are used and manipulated by central banks in favour of their domestic currency. For example, say China wants to increase the value of its currency, the yuan. China could sell its US dollar reserves and buy yuan on the foreign exchange markets

​

• A weaker domestic currency stimulates exports and makes imports more expensive; conversely, a strong domestic currency hampers exports and makes imports cheaper.
• Higher inflation can also impact exports by having a direct impact on input costs such as materials and labour.

​

• When there are too many imports coming into a country in relation to its exports—which are products shipped from that country to a foreign destination—it can distort a nation’s balance of trade and devalue its currency. The devaluation of a country's currency can have a huge impact on the everyday life of a country's citizens because the value of a currency is one of the biggest determinants of a nation’s economic performance and its gross domestic product (GDP). Maintaining the appropriate balance of imports and exports is crucial for a country. The importing and exporting activity of a country can influence a country's GDP, its exchange rate, and its level of inflation and interest rates.

​

Impact on Exchange Rates�

• A rising level of imports and a growing trade deficit can have a negative effect on a country's exchange rate
• The relationship between a nation’s imports and exports and its exchange rate is complicated because there is a constant feedback loop between international trade and the way a country's currency is valued. The exchange rate has an effect on the trade surplus or deficit, which in turn affects the exchange rate, and so on. In general, however, a weaker domestic currency stimulates exports and makes imports more expensive. Conversely, a strong domestic currency hampers exports and makes imports cheaper.

For example, consider an electronic component priced at $10 in the U.S. that will be exported to India. Assume the exchange rate is 50 rupees to the U.S. dollar. Neglecting shipping and other transaction costs such as importing duties for now, the $10 electronic component would cost the Indian importer 500 rupees.

Balance of Payments�

• The balance of payments (BOP), also known as the balance of international payments, is a statement of all transactions made between entities in one country and the rest of the world over a defined period, such as a quarter or a year. It summarizes all transactions that a country's individuals, companies, and government bodies complete with individuals, companies, and government bodies outside the country.

​

• The BOP is divided into three main categories: the current account, the capital account, and the financial account. Within these three categories are sub-divisions, each of which accounts for a different type of international monetary transaction.
• current account
• capital account
• financial account

The Current Account

• The current account is used to mark the inflow and outflow of goods and services into a country. Earnings on investments, both public and private, are also put into the current account.
• ithin the current account are credits and debits on the trade of merchandise, which includes goods such as raw materials and manufactured goods that are bought, sold, or given away (possibly in the form of aid). Services refer to receipts from tourism, transportation (like the levy that must be paid in Egypt when a ship passes through the Suez Canal), engineering, business service fees (from lawyers or management consulting, for example), and royalties from patents and copyrights.
• The Capital Account
• The capital account is where all international capital transfers are recorded. This refers to the acquisition or disposal of non-financial assets (for example, a physical asset such as land) and non-produced assets, which are needed for production but have not been produced, like a mine used for the extraction of diamonds.

​

​

​

The Financial Account

• In the financial account, international monetary flows related to investment in business, real estate, bonds, and stocks are documented. Also included are government-owned assets, such as foreign reserves, gold, special drawing rights (SDRs) held with the International Monetary Fund (IMF), private assets held abroad, and direct foreign investment. Assets owned by foreigners, private and official, are also recorded in the financial account.

​

Balance of Trade (BOT)

Balance of trade (BOT) is the difference between the value of a country's exports and the value of a country's imports for a given period. Balance of trade is the largest component of a country's balance of payments (BOP). Sometimes the balance of trade between a country's goods and the balance of trade between its services are distinguished as two separate figures

​

​

​

​

• Balance of trade (BOT) is the difference between the value of a country's imports and exports for a given period and is the largest component of a country's balance of payments (BOP).
• A country that imports more goods and services than it exports in terms of value has a trade deficit while a country that exports more goods and services than it imports has a trade surplus.
• In 2019, Germany had the largest trade surplus followed by Japan and China while the United States had the largest trade deficit, even with the ongoing trade war with China, beating out the United Kingdom and Brazil.

​

How to Calculate Balance of Trade?

• In order to compare imports and exports, Balance of Trade with evidence of the effectiveness of international commercial activities of a country. The BoT formula is as follows:
• TB (Balance of Trade) = X (total value of exports) – M (total value of imports)

​

Components of Balance of Trade

Let’s have a look in the three components of the balance of trade. These indicators are mainly used to compute the trade output and the results can either be trade deficit or surplus. Analysing the balance of trade gives you an idea of the cash outflows and inflows of the country.

Current Account

• The current account is used to record the inflow and the outflow of goods between nations. The current account is used to record the receipts and payments of all exported and imported goods that include raw material supplies and manufactured goods.

Financial Account

• The financial account is important to evaluate the change of domestic ownership of foreign assets and foreign ownership of domestic assets. When the foreign ownership is more compared to the domestic ownership it results in a deficit in the financial account. Thus analysing and understanding the changes in financial account allows determining whether the country is selling or acquiring more assets.

Capital Account

• The account that measures financial transactions between countries is known as capital account. It includes the purchase and sale of assets, properties and flow of taxes. The deficit or surplus in the capital account is managed through finance in the current account.

External Debt

• External debt is the portion of a country's debt that is borrowed from foreign lenders, including commercial banks, governments, or international financial institutions. These loans, including interest, must usually be paid in the currency in which the loan was made. To earn the needed currency, the borrowing country may sell and export goods to the lending country.

​

• Forex Impact On External Debt---

​

An increase in foreign reserves has a significant long run impact on several macroeconomic variables in developing countries. Its impacts however depends on the parameter values as well as is the interest rates. The purpose of this section is to test this theory using panel data on a large number of developing countries. We first exam in the relationship between foreign country reserves and total external debt outstanding and their average maturity. In terms of liquidity short term debt is more liquid than long term debt because sudden reversal in capital flows are more likely when that maturity is short.

External Debt of India----

• India's external debt rose modestly by 2.1 per cent year-on-year to USD 570 billion as of March-end 2021, notwithstanding the COVID-19 pandemic, according to the finance ministry. External debt to GDP ratio rose marginally to 21.1 per cent from 20.6 per cent as at end-March 2020.Reserves to external debt ratio, however, increased to 101.2 per cent from 85.6 per cent during the same period, thereby consolidating the country's position as a net creditor to the world, as per the status report on India's external debt released by the ministry.

Shorter average forrgein debt maturity therefore proxy the degree of foreign debt. Over theoretical analysis suggests that arise in foreign exchange reserves not only increase foreign debt but also causes a short form liquid to liquid debt in the following estimation we can therefore accept foreign exchange reserves to have positive impact on total external debt outstanding and a negative impact on average maturity.

The sovereign debt at USD 107.2 billion rose higher by 6.2 per cent over its level a year ago, mainly because of an increase in external assistance more than compensating the fall in FPI investment in government securities (G-Secs), it said. The non-sovereign debt, on the other hand, grew 1.2 per cent on a yearly basis to USD 462.8 billion.While NRI deposits grew 8.7 per cent to USD 141.9 billion, commercial borrowings at USD 197.0 billion and short-term trade credit at USD 97.3 billion shrank by 0.4 per cent and 4.1 per cent, respectively. At March-end 2021, long-term debt (with original maturity of above one year) was at USD 468.9 billion, recording an increase of USD 17.3 billion over the year-ago level.US dollar-denominated debt remained the largest component of India's external debt, with a share of 52.1 per cent as of March-end 2021, followed by Indian rupee (33.3 per cent), yen (5.8 per cent), SDR (4.4 per cent) and the euro (3.5 per cent).

"Over the years, policy on external debt has enabled the private sector to access foreign debt in a calibrated manner. As at end-March 2021, the level of non-sovereign debt was more than four times that of sovereign debt, compared to half as at end-March 1991," it said.Given its relative size, typically in a normal year, it is the relative rise in non-sovereign debt that influences the dynamics of India's external debt, thereby supplementing domestic savings to fund larger investments as the economy expands, it said.On the contrary, in the pandemic year, it was the relative rise in sovereign debt that accounted for a larger share in the overall growth of foreign debt (2.1 per cent), it said, adding this increase was due to the COVID-19 loans.

Source : RBI Annual Report

Table :- 2

On the other hand, within the non-sovereign debt, the growth-sensitive commercial borrowings and import-sensitive short-term trade credit shrank. Therefore, the pandemic disrupted growth-dependent constituents, though overall external debt level rose, it added.

Source : RBI Annual Report

Source : RBI Annual Report

FOREX RESERVE IMPACT OF MICROECONOMOY VARIABLE

CONSUMPTION

• Consumption in economics; the use of goods and service by households . Consumption is distinct from consumption expenditure ,which is the purchase of goods and service for use by households. Consumption differ from consumption expenditure primarily because durable goods, such as automobile generate in expenditure mainly in the period when they purchased , but they consumption services " until they are replaced or scrapped .
• Consumption in india = The average value for during that period was 69.47 percent with a minimum of 54.72 percent in 2010 and 87.38 percent in 1960.t he latest value from 2020 59.05 % .for companies the world average in 2020 based on 129 countries 64.36 %.

INVESTMENT

Investing is the act of allocating resources , resources money ,with the expectations of generating an income or profit . You can invest in endeavor , such as using money to start a business , or in assets. Such as purchasing real estate in hope of reselting it later at a higher price.

● In Investment , risk and return are two side of the same coin; low risk generally means low expected return while higher return are usually accompanied by higher risk.● Risk and return expectations can vary widely within the same reset many stocks pay quarterly dividends while bonds pay interest every quater.

● Investors can take the do it yourself approach or employ the service of a professional money manager.

IMPORT AND EXPORT

• Import are good purchased from the rest of the world by a country resident. ratherthan buying domestically produced items . Export are good and services that are produced items.
• Export are good and service that are produced domestically , but then sold to customers residing in other countries
• Import and export food grains of food grains, and issue of stocks under various schemes of world food programme aid on duration basis to other countries.
• Export refer to selling goods and services produce in home country to other markets. Import are derived from conceptually meaning as to bringing in the good service.
• Import and export of food grains and issue of stocks under various schmes of world food program government aid on duration basis to other countries.

GDP

• The GDP is the total of all value added created in an economy. the value added means the value of goods and service needed to produce them ,the so called intermediate.
• Gross domestic product is the value of mandatory value of all finished is the goods and service within a country during a specific period.
• GDP provide as economic snapshot of a country used to estimate the size of economy and growth rate.
• GDP are calculate in three ways using expenditure. production or income. It can be for inflation and population to provide deeper insight.

Table :- 3

SOURCE : RBI DATA

why India forex reserves are rising?

• India’s forex reserves crossed $500 billion for the first time ever in the week ended June 5, 2020. Unlike in 1991, when India had to pledge its gold reserves to stave off a major financial crisis, the country can now depend on its soaring foreign exchange reserves to tackle any crisis on the economic front. While the situation is gloomy on the economic front with GDP set to contract for the first time in 40 years and manufacturing activity and trade at standstill, this is one data point that India can cheer about amidst the Covid-19 pandemic. While it jumped by $8.2 billion in the week ended June 5, 2020, it is important to note that since the announcement of lockdown in March, it has surged by $31.8 billion. Hitting an all-time high of $501.7 billion as on June 5, 2020, India has come a long way since its forex reserves of $5.8 billion as of March 1991.
• The major reason for the rise in forex reserves is the rise in investment in foreign portfolio investors in Indian stocks and foreign direct investments (FDIs). Foreign investors had acquired stakes in several Indian companies in the last two months. According to the data released by RBI, while the FDI inflow stood at $4 billion in March, it amounted to $2.1 billion in April.

CORRELATION ANALYSIS

• Correlation matrix
• DATA USE FROM TABLE NO : - 3 For Analysis

​

​

​

• Correlation = -0.824590132
• Sign = High Negative (-)
• Magnitude = 0.82 which is high (magnitude should be always in between (-1 to 1))
• So, we have concluded that there is a negative relationship between Forex Reserve and GDP Growth Rate. if GDP Growth rate rise (increases) then the forex reserve will decrease.

​

REGRESSION ANALYSIS

• For the regression analysis we should have two variables
• 1. Independent Variable – Forex Reserve
• 2. Dependent Variable – GDP growth Rate (%)

EQUATION: y = a + b*x

FOREX = A+b*x

​

• X = Forex Reserve, Y = GDP growth rate,
• a = intercept , b = slope Intercept

​

​

​

​

• Report:-

​

• Y= Forex Reserve, X = GDP growth rate
• a = intercept ,
• b = slope
• Intercept(a) for the data (Table No : - 3) is 483.4069751
• Slope(b) for the data (table : - 3) is. -18.64388487
• To find the estimated FOREX Reserve for the year 2021-22 we take 50 Percent Of GDP growth rate.
• Y = a + b*x y
• = 483.4 + (-18.64) *50 y = 448.6
• That’s mean our estimated Forex for the year 2021 is 448.6

conclusion

• After the analysis for forex reserve of India we can say that forex is a major indicator of developing economy growth because a good forex reserve show much better and strong economy. Every economy need foreign exchange reserve for trade purpose.
• By October 2021, India forex reserve reached to $640 Billion. At time India had to mortgage it’s sovereign gold in 1991 to received loan from the world bank.
• Forex reserve in 1960 could support 3 weeks import while, In 2021 FR can support 16 months import.
• India forex reserve was meagre $5.8 billion back in March 1991 and now it has increased by $100 billion in last one year.
• Forex reserve is a backbone support of Crisis management, Finance Management and maintenance the liquidity of the foreign currency. FR are economically supported but generally considered last resort.
• An expanding forex reserve gives the RBI and the government much scope and flexibility to mange to macroeconomic factors.
• Rising forex reserves also inspire confidence in market about economy.

References

• https://rbi.org.in/
• https://www.investopedia.com/
• Money control
• https://economictimes.indiatimes.com/
• IMF

​

​