India builds up forex reserves as China, others eye foreign assets

Last Updated22/04/2022

Countries like India and Switzerland accumulated foreign exchange (forex) reserves rather than investing in assets abroad to prevent currency appreciation.
According to a research report from Credit Suisse, global forex reserves as a share of GDP have fallen from 15.4 per cent of GDP to below 14 per cent in the last six years.
Global reserves increased steadily from US$ 2 trillion in 1999 to US$ 12 trillion by 2014, but stagnated thereafter. “As a share of global GDP, after rising from 5.5 per cent in 2000 to 15.4 per cent in 2014, they are now below 14 per cent
The report said the share of US dollar in the global forex reserves fell from 71 per cent in 1999 to 59 per cent in 2021. Chinese Yuan Renminbi (CNY) share is at 2.7 per cent (Russia holds a fourth of these)

Foreign Exchange reserves or Forex reserves are assets such as foreign currencies, gold reserves, treasury bills, Other Government Securities etc retained by a central bank or other monetary authority.
RBI is the custodian of the Foreign exchange reserves in India.
Reserve Bank of India Act, 1934 and the Foreign Exchange Management Act, 1999 set the legal provisions for governing the forex reserves in India.
It checks the balance payments and influences the foreign exchange rate of its currency and maintains stability in financial markets.

Ensures that the central bank has backup funds if their national currency rapidly devalues or becomes altogether insolvent.
It also assists the government in meeting its external debt obligations and maintain a reserve for national disasters or emergencies
They help to support and maintain confidence in monetary policy action or any exchange rate intervention to support the domestic currency.
A country with a good stock of forex has a good image at the international level because the trading countries can be sure about their payments.
A good forex reserve helps in attracting foreign trade and earns a good reputation in trading partners.

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Countries accumulating assets abroad is one of the reasons for this decline
- As per the report, countries led by China are focussing on accumulating assets abroad rather than boosting foreign exchange (forex) reserves.
- Reserves have fallen sharply in China and Saudi Arabia – which are now investing in assets abroad instead of accumulating forex reserves.
Role of countries like India and Switzerland
- Countries like India and Switzerland accumulated reserves rather than investing in assets abroad to prevent currency appreciation.
- India’s forex reserves were $ 604 billion as on April 8, 2022.
- The report said if not for Switzerland and India, global forex reserves would have fallen in absolute terms too.

The rise in the forex reserve of Switzerland and India has less to do with sequestering the country’s savings into safe assets.
These countries are focusing on protecting the local currency from appreciating against the USD.
They bought dollar assets to prevent Swiss franc and rupee appreciation which resulted in increase in the reserve.

A country running current account surpluses will accumulate foreign assets over time.
China and Saudi Arabia are examples of countries that surpassed what was necessary as insurance and shifted their mix of foreign assets away from forex reserves.
This diversification added to safety and promised better returns, either financial or geopolitical.
Saudi Arabia, Singapore and Norway have built Sovereign Wealth Funds and countries like Japan and China have allowed their firms to buy assets abroad.
Such assets are hard to use in times of crisis, but are better overall for the economy

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