The decline in India’s foreign exchange reserves is largely due to valuation changes arising from the appreciation of the US dollar, Union Finance Minister Nirmala Sitharaman said.
He made these remarks while addressing the International Monetary Finance Committee (IMFC) during the ongoing annual meeting of the World Bank and the International Monetary Fund (IMF) here on Friday.
“India’s foreign exchange reserves, at $537.5 billion as of September 23, 2022, compare favorably with most peer economies. Two-thirds of the decline in reserves is due to valuation changes arising from appreciation of the US dollar and rising US bond yields,” Sitharaman said.
In fact, there has been an increase of $4.6 billion in foreign exchange reserves in the first quarter of 2022-23 as per the balance of payments (BoP). Other external indicators such as net international investment position and short-term debt also indicate lower vulnerability, he said.
In fact, India’s external debt-to-GDP ratio is the lowest among major emerging market economies (EMEs), it added.
India’s foreign exchange reserves fell by $4,854 billion to $532,664 million on September 30, according to the Reserve Bank of India (RBI).
The fall in reserves during the week ending September 30 was due to a fall in foreign currency assets (FCA), a major component of overall reserves, the Weekly Statistical Supplement published by the RBI said.
According to Sitharaman, high imported inflation pressures remain an upside risk to the future trajectory of inflation, amplified by the continued appreciation of the US dollar.
In fact, inflation has remained at the upper tolerance limit of 6 percent or above since January 2022, he said.
In this context, Sitharaman said, the calibrated withdrawal of monetary accommodation has continued to curb the widening of price pressures, anchoring inflation expectations and containing second-round effects. India is in a better position than many other advanced or emerging market economies, he said.
In this tumultuous global environment, India’s external financing position remains comfortable despite widening current account deficit (CAD) to 2.8 per cent and trade deficit to 8.1 per cent in the first quarter from 2022-23, the minister said.
The higher trade deficit is expected to be offset by increased service exports and increased remittances. The CAD is generally expected to be within 3 percent of GDP. With portfolio flows stabilizing and foreign direct investment (FDI) remaining strong, this type of deficit is bankable, he said.
The recovery of the business sector, as well as the banking sector, provides a cushion to absorb risks in the economy. In the pre-pandemic phase, these sectors suffered from the double problem of balance sheet. Restoring their balance sheets has been a priority, he added.
Sitharaman said the soft interest rate regime during the COVID-19 years helped companies restructure their debt and reduce interest costs. Since then, its debt-equity ratios have fallen to 0.5. The reduction in the corporate tax rate in the pre-COVID-19 phase also helped companies absorb the impact of the pandemic.
Similarly, the banking sector has recorded six-year lows in non-performing assets (NPA) and slippage ratios, while capital to risk-weighted assets ratio (CRAR) and provision coverage ratio (PCR) have increased , said.
India is also seeing strong credit growth of 15 per cent in September 2022. The total flow of resources to the corporate sector so far is five times higher than last year’s mobilization, mainly through bank credit, CP and FDI, said.