Get to know about the Forex Reserves and Foreign Direct Investment (FDI) inflows to India and also the role of USD-INR rate movement in India’s economy. To give a flavour, read further to know about the correlation between Forex Reserves and USD / INR exchange.
We may think that our Indian currency is the merely one that is superintend of our economic impact, but that's not the case up here. The influence of US currency in our economy has a tight grasp than our Indian currency. This state of affairs is because of being an Importing Country which means our importing value surpass our exporting value. As the US currency shares a major portion of our Indian economy, the price movements of USD/INR has a huge impact over our economy. To give a word, our trade deficit as of 2020 acquired a value of 151,125 million USD and if the exchange rate of USD/INR rises a rupee it will have negative impact of 151,125 million INR. On contrary, if the exchange rate of USD/INR drops a rupee there will be a positive value of 151,125 million INR. Because of this situation of India, the US government brought about a saying "My Currency Your Economy". To keep you interesting, in this blog we will be covering about the introduction and it's significance of Forex Reserves followed by Foreign Direct Investment and it's inflows to India. After this we'll dive deeper to explore about the exchange rate of USD/INR and USD/RMB (Chinese currency) by considering the values over a period of 20 years.
Forex Reserve
Defining Forex Reserve
Forex Reserves are external assets in the form of Gold or Foreign currency accumulated by India through Foreign Direct Investment or capital inflow and managed by the Reserve Bank of India. The International Monetary Fund states that Forex Reserve are held in support of maintaining confidence among exporters and also helps in managing the exchange rate value to be in control. It also helps with external pressure by maintaining Forex Reserves to withstand in time of financial crisis.
Importance of Holding Forex Reserves
India's Forex Reserves are rising and to reach the mark of 500 billion USD soon. In the month of May the value of Forex Reserve of India was 442.05 billion USD making it as an all-time high. The rising Forex Reserves helps in maintaining the economy to withstand it's external obligations and also gives a lot of comfort to the government and the Reserve Bank of India to manage the economic growth of India which is set to attain 2.5% growth in 2020-2021. It also stands as a pillar for the economic front in case of financial issues and enough to cover all the import bill of a country. The portion of Forex Reserve to GDP of India is 15%. It also plays an indispensable role in strengthening the India rupee against dollar. Forex Reserves gives confidence and abet government in external debts and also maintains a portion in case of a catastrophe or natural disasters.
Forex Reserve of India
This chart is a representation of Forex Reserves of India starting from the year of 2000 to 2020. The Forex Reserve value of India in 2000 was 33,429 million USD and gradually attained a value of 190,863 million USD in the year of 2007. After that, there was sudden boom in the year of 2008 reaching a height of 295,099 million USD. Followed by the next year, the value slumped to 244,080 million USD with a fall value of 51,019 million USD because of Subprime crisis. However, after the depreciated year the growth was stable and reached its peak in the year of 2020 with a value of 442,053 million USD and marching towards the vision of making a 500,000 million USD Forex Reserve.
Gold Reserve of India
This Bar Chart reveals the data of gold reserves of India from 2000 to 2020. To start, in the year of 2000 the gold reserve value was 3,104 million USD and to give a flavour the value dropped the very next year to 2,711 million USD. Albeit of having a depreciation in 2001 the following years had a smooth rise curvature till 2009. After the end of 2009 something happened phenomenal and the gold reserve value just bloomed to 17,920 million USD. The following years of 2011 and 2012 faced a rise in value of gold reserves. Then the growth stopped and started declining. By the end of 2016, the glided value of gold reserves came down to 19,325 million USD. In spite of having a constant decrease in values, it started recovering progressively in the approaching years. The gold reserve value as if 2020 is 27,856 million USD and covers about 5.93% of India's total Forex Reserves.
Top 10 Forex Reserve Countries as of 2020
The top 10 Forex Reserve countries are namely :
China - 3,400 Billion USD
Japan - 1,400 Billion USD
Switzerland - 850 Billion USD
Russia - 562 Billion USD
Saudi Arabia - 501 Billion USD
Taiwan - 479 Billion USD
Hong Kong - 475 Billion USD
India - 442 Billion USD
South Korea - 409 Billion USD
Brazil - 359 Billion USD
Climbing to the first place China is having a colossal amount of Forex Reserve as it is the largest manufacturer and exporting country across the globe. The following two cases Japan and Switzerland also having a massive Forex Reserve value when compared to the rest. Taking China and India the differential value between them is 2,958 billion USD and it takes years for India to climb up to this value. This state of affairs is because of our surplus amount of import and diminutive amount of exports. If India turned out to become an exporting country there will be possibility of shifting the perspective of Forex Reserve value.
Foreign Direct Investment (FDI)
Defining Foreign Direct Investment (FDI)
Foreign Direct Investment is when a company takes controlling proprietorship in a business entity in another country. With Foreign Direct Investment, external companies takes place in day-to-day operations and activities in other countries. So, the companies don't just bring down money to invest but also their ideas and innovations. In general, FDI takes place when an investor having controlling ownership in a foreign company or establishing foreign business ventures and acquiring foreign business assets.
Foreign Direct Investments of India
This is a Bar Chart exposing the Foreign Direct Investment of India from 2014-2019. In 2014-2015 the FDI value of India was uplifted to 24,748 million USD and we can also scrutinize that in 2014-2015 the value was at it's surface when compared among others. Followed by 2015-2016 the value enlarged to 36,068 million USD with a growth value of 11,320 million USD. In the year of 2016-2017 the value of FDI was a way more similar to the value of 2015-2016 and to be precise the observed growth value was just 249 million USD. Coming to the case of 2017-2018 the value was 37,366 million USD and also we observe a visible growth from 2016-2017 with a value of 1049 million USD. Finally in the year of 2018-2019 the FDI value was 38,744 million USD. During fiscal ended March 2019, India received an all-time high inflow of 38.74 billion USD.
Country-wise FDI Inflows to India in 2018-2019
To give a note, this Bar Chart represents the countries which are considered as the highest inflows of FDI to India in the year of 2018-2019. The most dense coloured Bar line is associated with the country of Singapore acquiring the position of leading inflow of FDI to India with a value of 14 billion USD. The following dense coloured Bar line is associated with Mauritius claiming to be the second largest inflow of FDI to India with a value of 6 billion USD. To say, the first two cases are the most peculiar having dense coloured Bar line but the rest is most likely to have similar dense Bar lines. So, grouping the countries which are having orange based dense Bar lines and to name the countries: USA, Japan, Netherlands, Others. The sum up value of this orange group is 10 billion USD led by USA with a value of 2 billion USD. The following group is going to be the yellow group having yellow based dense Bar lines. The sum up of this group is 7.4 billion USD led by United Kingdom with a value of 1.2 billion USD and the least inflow of FDI to India is associated with the country of Luxemburg with a value of 251 million USD.
Sector-wise FDI Inflows to India in 2018-2019
To give a note, this Bubble Chart shows the various sectors from which the FDI value of India is accumulated. The biggest bubble which draws our attention is the Manufacturing sector filled with purple. The value gained from the source of Manufacturing is 7.9 billion USD. Followed by the sector of Financial Services claiming to be the second largest source of FDI with an inflow value of 6.3 billion USD. The forthcoming sector would be Communication Services with a value of 5.3 billion USD. The following sectors Computer Services and Retail & Wholesale Trade can be grouped together with respective to their inflow value. The whole sum of this group is 7.7 billion USD led by Retail & Wholesale trade with a value of 4.3 billion USD followed by 3.4 billion USD. The second group comprises the sectors of Electricity and Energy, Business Services and Construction. This group is led by Electricity and Energy with a value of 2.4 billion USD followed by Business Services with a value of 2.5 billion USD and the last sector is obviously Construction with a value of 2.09 billion USD. Gathering the rest, forms the third group comprises the sector of Education Research, Transport and Miscellaneous Services having a sum up value of 2.9 billion USD. Finally to give a flavour the total sum up value of sector-wise inflows of FDI to India in 2018-2019 is 38.1 billion USD.
Top 10 Foreign Direct Investment Countries
The top 10 Foreign Direct Investment countries as of 2019 includes :
United States of America - 251 billion USD
China - 140 billion USD
Singapore - 110 billion USD
Brazil - 75 billion USD
United Kingdom - 61 billion USD
Hong Kong - 55 billion USD
France - 52 billion USD
Canada - 47 billion USD
Germany - 40 billion USD
India - 39 billion USD
When comparing the values of 2019 with the values 2018 we can scrutinize some variations in their rankings. The leading countries of USA and China remained same and had a billion USD gain in the year 2019. According to the values the third largest FDI country is Hong Kong in 2018 with a value of 104 billion USD but step downed to the rank of 6 in 2019 with a value of 55 billion USD and this state of affairs is because of the Act of controlling Hong Kong by China. The approaching fourth largest FDI country is Singapore which acquired the rank of Hong Kong in 2019 and being the Stock Market Hub of the world the value raised from 78 billion USD to 110 billion USD. The following fifth ranked country as of 2018 and 2019 was UK but had a depreciation in FDI value of 4 billion USD to elaborate from 65 billion USD to 61 billion USD. Brazil was at the rank of 6 in 2018 with a value of 60 billion USD but made to attain the rank of 4 in 2019 with a value of 75 billion USD and to say, the growth FDI value of Brazil was 15 billion USD. Canada, being ranked at 7 in 2018 came down to rank 8 in 2019 but it had a raise in FDI value from 43 billion USD to 47 billion USD. In the year of 2018 two countries namely France and India shared it's value equally with 37 billion USD. Howbeit, France faced a growth in FDI value from 37 billion to 52 billion and acquired the rank of 7 in 2019 on the other hand India faced a backward change in it's rank from 9 to 10 but had a rise in value from 37 billion USD to 39 billion USD. The last and the most interesting case among this is Germany. Germany is considered as the Technological hub of the world it attained the rank of 9 in 2019 from 10 and had a phenomenal rise in FDI value from just 12 billion USD to 40 billion USD and this was attainable for Germany as the world has shifted towards the phase of technology.
USD / INR Exchange Rate
This Treemap representation exposes the data of USD/INR exchange rate from 2000 - 2020. We can scrutinize the rise of density over the period from dark blue to dark red which reveals the escalating exchange rate. Starting from the year of 2000 the USD/INR exchange rate was 43.62 rupees. In the very next year the value raised by 3 rupees from 43.62 rupees to 46.64 rupees. In the approaching year of 2003 the value increased to 48.80 rupees reporting a raise value of 2 rupees. After these two cases the growth was not seen until the year of 2011. From 48.80 rupees in 2003 the exchange rate value declined to 44.65 as of 2011 and to give a flavour, the exchange rate faced decline in value for eight years and had an all-time low in the year of 2008 with a reported value of 39.97 rupees along with an exceptional growth in the year of 2009. Howbeit facing decline in value for eight years, in the year of 2012 the value raised phenomenally from 44.65 rupees to 51.16 rupees along with a reported raise value of 6 rupees. Like how we faced decline in value for eight years, after the year of 2012 the exchange rate faced only increase in value till the present year of 2020 from 51.16 rupees to 75.39 rupees. We can also notice the gradual change of density from blue in 2012 to dark red in 2020. To be elaborate, this exchange rate movement is because of Globalisation and huge trade deficit faced by India and results in huge spike in exchange rate. But this sitch is not there in China. Read further to know about Chinese exchange rate value.
USD / RMB Exchange Rate
A cornerstone of China's economic stratagem is to manage the Yuan exchange rate value for the beneficiary of its exports. From the above chart we can scrutinize the leveraged value of exchange rate from the year of 2000 to 2005 is 8.28 Yuan. To give a flavour, China was able to manage this because of its humongous Forex Reserve with a value nearing 4000 Billion USD also it does not have a floating exchange rate (the values are determined by the Forex Market) as is the case with most advanced economies. After the year of 2005, China started facing the pressure given by major importers also they requested to appreciate the value of Yuan against USD. In order to fulfill the mindsets of their importers China decided to appreciate their value by 2.1% against USD. In the following years of 2009 China resumed its policy of gradually increasing the value of Yuan against USD and was at its peak in the year of 2013 with 6.18 Yuan per USD along with, China also managed to remain the constant of 6 Yuan for a decade. Finally, in the year of 2020 the exchange rate value was 7 Yuan and also we can notice an appreciation of value when compared to 2019. To give a note, from this data it is clear that China has a definite control over their exchange rate value and also they have the ability to remain prosper even there is a crisis among their exchange rate as they have a prodigious amount Forex Reserve.
Rising Forex Reserves amid COVID-19
The major reason for the rise of Forex Reserves amid COVID-19 is the rise in Foreign Direct Investment (FDI) of India. Foreign investors had acquired stakes in several Indian companies. India also witnessed the rise in Forex Inflows moving towards the mark of 500 billion USD as the subsidiary company of Reliance Industries spectated a series of Foreign Investments totalling Rs.104,000 Crores. Along with this, the decline in value of Crude Oil resulted in the reduction of oil import bill. Similarly, external costs and foreign transportations have fallen steeply-down in this period. Considering these reasons, the outflow of USD from India had declined which resulted in rising of Forex Reserves.
But still, our Forex Reserve values are low when compared to the advanced economies like China. We can't manage our exchange rates if our INR appreciated say from 75 rupees to 65 rupees against USD, the exporters will suffer a lot as they would calculate their trade value with contract to 75 rupees. Whereas, in China they have a massive amount of Forex Reserve which they use to fix a pre-informed rate over a long period to protect the interest of their exporters. If India needs to attain this state of affairs, we need to follow the policy of "AATMA NIRBHAR BHARAT" meaning, to be self-reliant. If this vision of India comes true the outflow of USD from India declines phenomenally resulting in growth of Forex Reserves and possible to cure the US Dollar Phobia.
As usual, splendid work Nikhil. No complicated calculations this time though. Depicting macro economics data in understandable manner itself a tough job.
Good one Nikhil
Good work Nikhil
Good Nikhil 👍
If India turned out to become an exporting country there will be possibility of shifting the perspective of Forex Reserve value.