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India Forex Reserves Edge Towards $400 Billion

By Mr. Crowd 11 Sep 201720:25





This September, India’s Forex reserves have jumped $3.5 billion to closing in on the $400 billion mark. This has been due to strong entries from foreign investors into India’s markets that have coincided with a movement in gold reserves with the central bank.

Increase in Gold Reserves
According to The Economic Times, Soumya Kanti Ghosh, chief economist of the State Bank of India, said: “The increase in gold reserves is a big positive and could be mainly driven by the lessening of uncertainty over imposition of Goods and Services Tax which could have driven up demand for gold in the market.” Bankers have pointed to the accumulation of gold as reserves as a strong point for the central bank“ as it is considered to be a safe haven much like the dollar.”

Too Much Money!?
The effect this will have on the Indian economy is one of the toughest questions facing the country’s financial sector. Bloomberg claim that India’s central bank is having to mop up inflows that is adding cash to the local banking system in order to keep the rupee stable and exports competitive. The financial site points out that the banks already has too much money due to Prime Minister Narendra Modi’s demonetization program last year. This has left them struggling to pay interest on the deposits in an environment where loans are not picking up. The cost to mop up these inflows has been steep with the Reserve Bank of India halving its annual dividend to the government. Foreign investors, however, have pounced on the situation and poured $18.5 billion into Indian equities this year.

The Impact of Cryptocurrencies
The increase in cryptocurrencies across the globe is having an effect on the business interests of both foreign investors and Small and Medium-sized Enterprises (SMEs). As businesses are becoming more global, SMEs are looking to take advantage of currency fluctuations, and invest in cryptocurrency markets. This had led to a rise of financial programs to assist them.

One such program is The Hive Project, “a cryptocurrency invoice financing platform created to help SMEs get the financing they need,” that was founded this year. The project provides an alternative source of liquidity compared to offers from traditional financial institutions. Jure Soklic, co-founder and CEO told the EconoTimes: “for too long, SMEs have been left out in the cold by traditional lending systems which favor large companies.” With record reserves recorded in places like India more SMEs will use more traditional markets like FOREX and cryptocurrencies like Bitcoin to trade and invest. As the U.S. and Australian governments move to regulate cryptocurrencies, platforms like The Hive Project, which seek ways around the regulations, are a good indicator of the shift in SMEs interests.

The Problem: How to Manage the Excess Liquidity

India’s Forex reserves are expected to hit $4 billion this September. Derrick Kam, an economist at Morgan Stanley wrote in a note “as the excess liquidity challenge looks set to persist, the RBI will need more tools to manage this, such as the standing deposit facility.” In the conclusion to their article Bloomberg stated: “Apart from high costs, there’s another dimension to the surge in liquidity. The RBI could face a shortage of bonds it places as collateral with its creation of a window – the so-called standing deposit facility – which doesn’t’ require any collateral.” One thing is sure, global markets and SMEs will be paying close attention to the opportunities presented by this record increase in India’s Forex.




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