Higher foreign exchange reserves reduce foreign borrowing costs and hedging costs

According to an article published in the monthly newspaper RBI, the increase in foreign exchange reserves has lowered the cost of borrowing abroad and hedging costs for companies. Since 2019, the RBI’s foreign exchange reserves reached $642.453 billion in the week ending September 3, 2021, more than double its reserves at the end of December 2018. At its peak, reserves were sufficient to cover 18 months of imports. Foreign exchange reserves were measured by import cover, which is no longer the norm. But in March 2022 alone, foreign exchange reserves fell by $14.272 billion.

The central bank said the views expressed in the article are those of the authors and do not represent their views. The increase in India’s reserve buffer in recent years is due to the modest level of the current account deficit (CAD) relative to the level of net capital inflows. This is broadly consistent with trends seen in some Emerging Market Economies (EMEs) in the post-Covid era, partly reflecting the impact of very accommodative monetary policies in major Advanced Economies (EAs) and causing an outflow of funds.

While the rupiah came under pressure from capital outflows following rising interest rates in developed economies and the conflict between Russia and Ukraine. “India has observed greater hedging of foreign exchange reserves, reducing the cost of external debt and the cost of hedging,” the article “Forex Reserve Buffers in Emerging Market Economies: Drivers, Motives and Impacts.” ‘ said. It was authored by its Dirghau Keshao Raut and Deepika Rawat of the Economic Policy Research Department of the RBI.

Higher yields, the article says. The country’s DAC registered a sharp decline in 2019-20 and a surplus in 2020-21. The capital account, on the other hand, has been driven by foreign direct investment (FDI) and has recorded a surplus over the past two years. As a result, foreign exchange reserves increased by $147 billion in 2019-20 and 2020-21 (BoP basis). Reserve additions for 2021-22 (including valuation effects) were in the order of $30 billion.

The article goes on to say that emerging economies have accumulated reserves during the COVID-19 period, taking advantage of abundant global liquidity, supported by the very accommodative monetary policies pursued by major advanced economies. said. Several emerging markets have seen reserve-to-GDP ratios and reserve optimization. According to the report, empirical analysis shows that long-term reserve accumulation in emerging markets is driven by precautionary rather than mercantilist motives.

Foreign exchange reserves include investments in foreign currencies (including investments in foreign bonds and deposits with other central banks), gold, special drawing rights (SDRs) and positions in the reserve tranche (RTP ). The article states that since October 2021, there has been a portfolio outflow due to a reversal in monetary policy stance in major emerging economies and the ensuing conflict between Russia and Ukraine. This is reflected in the depletion of foreign exchange reserves in recent months.

Summary of news:

  • Higher foreign exchange reserves reduce foreign borrowing costs and hedging costs
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