- Date : 23/05/2021
- Read: 5 mins
Explore new avenues and instruments of investment and diversification with India’s growing foreign reserves.
The highlight of 2020 was not just COVID-19. Amidst the havoc created by the pandemic, there was an important piece of economic news that went mostly unnoticed. India’s forex reserves overtook that of Russia’s, which boosted the country’s rank to fourth in the world after China, Japan, and Switzerland.
It may sound hard to believe, but it’s true. In fact, the foreign exchange reserves of India touched a record $560.63 billion according to the data released by the Reserve Bank of India (RBI). Undeniably, this was a commendable achievement as the forex reserves had doubled from $275 billion since 2013.
What it means for Indian investors
With foreign exchange in India on an upward swing, the landscape for Indian investors is also witnessing a shift. Here’s a rundown of how investors can benefit from India’s growing foreign reserves.
1. The expanding market
Despite a slowdown in the economy, primarily due to the COVID-19 outbreak, India’s forex reserves chart is indicative of positive growth. A burgeoning domestic middle class and a growing young and working population increases investor confidence in an expanding consumer market.
Another key reason is the country’s strategic geographical location and its borders with Bangladesh, Nepal, Pakistan, Sri Lanka, and Myanmar. This makes India the ideal gateway to do business with these international markets as it automatically amplifies reach.
Tip: Consider investing in infrastructural projects in emerging markets in India’s tier 2 and tier 3 cities.
2. Ease of doing business
Between 2015 and 2020, India jumped approximately 79 places on the ‘Ease of Doing Business’ parameter adjudicated by the World Bank in its ‘Doing Business Reports’. The Modi-led central government has been focused on laying any investor fears to rest by making it easy to do business in India.
State governments too have been putting together proposals to attract domestic investor interest to their respective regions. The Public-Private Partnership (PPP) model has been garnering a lot of interest in recent times.
Tip: With India’s biggest improvement being in the technology space, Indian investors may wish to explore opportunities in the telecommunications sector.
3. Well-managed public finances
The Fiscal Responsibility and Budget Management (FRBM) Act, 2003 imposed certain limits on government debt and fiscal deficit. It also ensured that the government conduct remains prudent, transparent, and accountable at large.
Along with the increase in forex reserves, it has created the perfect environment for foreign direct investment as the external vulnerabilities are at their lowest.
Tip: It is best to search for investment instruments that are diverse and offer yield resulting in greater fluctuations of capital inflows.
Related: History of Indian currency
4. A robust and resilient financial system
The Reserve Bank of India, with its support to emerging market central banks, has successfully laid the foundation of a thriving and uniquely rich payment ecosystem in the country. The range has expanded with a number of non-banking partners entering the market and making the country’s financial system more robust and resilient.
In the wake of the virus outbreak, the country’s financial institutions continued to function normally. This automatically boosts investor confidence, specifically in the local stock market.
Tip: With foreign investors purchasing shared worth $6.47 billion in 2020 alone, share prices of stocks across industries have gone up. Therefore, investors must not get swayed and instead focus on discovering stocks with sound valuations.
5. A strong infrastructural base
Traditionally a strong and diversified manufacturing base, India has successfully and systematically rolled out the PPP model, facilitating and prioritising the delivery of high demand infrastructure and quality public utilities and services.
In addition to that, India remains a politically stable country. With cordial relations within the geographical region, India has defined its reputation as being a favourable destination for building global start-ups. This has raised efficiencies by creating social assets, especially with capital inflows into the local economy.
Tip: Consider investing in AAA-rated corporate dollar bonds that may provide better returns in comparison to sovereign credit.
6. Exchange rate policy and foreign exchange reserves
Progressive liberalisation of the payment and exchange regime in the country has made the market more flexible. With one of the most realistic and least volatile exchange rate policies in emerging market economies, India guarantees timely payment for repatriation of profits and portfolio outflows.
The rising inflow of foreign currencies undoubtedly instils confidence in India’s capability to manage the balance of payments.
Tip: Increase your gold investments and diversify into purchasing more dollars; this will offer better returns in comparison to sovereign credit.
When it comes to foreign exchange reserves by country, India has a clear advantage. The growth in forex reserves has gone far in addressing investor hesitancy. It’s developed a positive sentiment that the country has the ability to meet its external debt obligation and foreign exchange needs.
The achievement also highlights support to the domestic currency by external assets. This ensures that India has sufficient reserves to manage national disasters and emergencies of any kind. Thanks to efficient managing by the RBI, the rising foreign exchange scenario will unquestionably benefit Indian investors. How to transfer a large amount of money to India?
Disclaimer: This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.