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Opinion

Crossing the $ 500 billion mark – editorials

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India’s foreign exchange reserves are reassuring. But the vulnerabilities persist

editorials
Updated: June 17, 2020 09:52 IST

The fact that the country suffered chronic balance of payments crises from Independence to the early 1990s is now a historical footnote for the last generation of Indians, but the memory of past weakness remains strong in government.
The fact that the country suffered from chronic balance of payments crises from Independence to the early 1990s is now a historical footnote for the last generation of Indians, but the memory of past weakness remains strong in the government (Aniruddha Chowdhury / Mint)

India’s foreign exchange reserves passed the half-trillion dollar mark this month, providing a silver lining to an otherwise clouded economic outlook. India has enough foreign exchange to cover one year’s imports. The deterrent effect this has on speculators is one of the reasons why the rupee exchange rate has remained stable during the blockade. The fact that the country suffered chronic balance of payments crises from Independence to the early 1990s is now a historical footnote for the last generation of Indians, but the memory of past weakness remains strong in government. . The Reserve Bank of India was buying dollars when the pandemic began to shore up reserves, an act that now seems overly cautious. Instead, the government should be asking how it can leverage its reserve reserve to meet the goal of making India a global center for financial services.

Foreign exchange reserves fell in March, but have increased in recent weeks. One reason is that the outputs are smaller. Sharp falls in oil and gold imports and external remittances have meant that the demand for foreign exchange has been minimal. But the main reason has been a steady flow of currency into the country despite the closure. Foreign direct investment has continued apace. Portfolio investment has returned. There are reasons for the discomfort: the collapse of India’s exports and the fact that much of the inflow is a consequence of liquidity-struggling Indian firms selling stakes to foreign buyers. It is good to bury a ghost from the past, but it is important not to forget that India still has many financial vulnerabilities.

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