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India’s Forex Reserve Met a Lifetime High Last Month

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The forex market is the largest financial market in the world, with a daily volume of over $5.1 trillion in 2019; even larger than the stock market, which has a daily volume of about $84 billion. Almost 19 years ago, in April 2001, the Indian forex reserve was barely reaching $42.69 billion, but now, things have drastically improved. The Indian forex market registered an increase of 11.15 times in February 2020, reaching $476.1 billion by February 14. 

The beginning of 2020 saw some big increases in the country’s forex reserves, and the trend seems to be ongoing. In the week to January 31, the forex reserve grew by $4.607 billion, reaching $471.3 billion. According to data from the Reserve Bank of India (RBI), this growth was helped by a rise in foreign currency assets. Then, in the following week, the reserve grew again, reaching a lifetime high of $473.94 billion, only to exceed it again a week after. 

All throughout 2019, India’s central bank kept accumulating dollars, which made 2019 the year Asia registered the biggest jump on foreign exchange reserves. But the foreign exchange market was not the only market that saw an increase in India. The value of the gold reserves also climbed $539 million, reaching $29.662 billion. 

What Does This Mean For India?

The Indian rupee is not exactly having its best moment, seeing a decrease of more than 2% in the past week, after a significant number of locals were diagnosed with the coronavirus. This makes the rupee the worst-performing currency in Asia this month, after managing to escape the almost undamaged in February. 

The FX reserves can come to the advantage of the RBI, as they now have the means to arrest the rupee’s losses, according to Sajal Gupta, head of foreign exchange at Edelweiss Securities Ltd. He goes on to say that what India is experiencing is a panic rupee reaction.

Compared to other Asian countries, India saw the biggest increase in foreign exchange reserves last year, growing by $64 billion. Meanwhile, China’s reserve added $35 billion, Indonesia $8.5 billion and Malaysia only $2.2 billion.

Sen Gupta and Aastha Gudwani, India economists at BofA Securities have estimated that, in the next financial year, FY21, we can expect India’s forex reserve to reach $550 billion. They are also expecting the RBI to increase forex reserves, even if this means a weak rupee, at any opportunity the see, as the forex reserve is the only insurance India has against global contagion.

Where Does India Stand Compare To The Top Forex Reserve Holders?

China and Japan continue to be the top two global reserve holders, with astonishing numbers. China has a reserve of $3,234 billion, more than double when compared to Japan, which sits at $1,342 billion as of January 2020. The following top countries sit way below $1,000 billion, with Switzerland at $855 billion, Russia at $562 billion, Saudi Arabia at #499.5 as of December 2019, and Taiwan at $479 billion. 

India reached number 7 on the list, thanks to the results from February 2020. 6 years ago, at the end of 2013, India was close to making number 10 but ranked 11 on the list. Read more about PM Kisan for more information on PM Kisan Samman Nidhi Scheme.

India depends highly on foreign capital, as it has dollar obligations and is a current account deficit economy. This is why recent FX results can only work in India’s benefits, even though the Indian rupee was still depreciating against the US dollar at the beginning of last month. Two weeks ago, the USD/INR pair was down by 21 pips (+0.64%), while last week, the exchange rate increased again, reaching +0.92%. 

The fact that the forex reserve is continuously building up helps the Indian economy tremendously, providing a strong buffer against an uncertain global economy. Radhika Rao, an economist at DBS Bank stated that this growth brings a bit of stability, especially given the fact that India still has a rising external debt. 

What Indian Forex Traders Need To Keep In Mind

The foreign exchange market in India does have some limitations in terms of what Forex instruments they can work with. The Indian Exchanges offer traders the possibility to trade a limited number of currency pairs. Up until 2015, Indian traders could only work with 5 currency pairs (GBP/INR, USD/INR, EUR/INR, and JPY/INR), but on December that year, the RBI allowed exchanges to also offer options and futures contracts in three other pairs: EUR/UDS, UDS/JPY and GBP/USD. 

But why these limitations? Well, the RBI is trying to keep the Indian forex reserve as high as possible, in order to succeed in shortening the difference between the country’s external debt and the foreign exchange reserve. So, technically, every time someone trades with a non-Indian broker and loses, they increase the current account deficit. 

But the forex market still remains, for the most part, a decentralized market, meaning traders can open accounts with forex brokers from all over the world. Some of them, such as those who state binary options trading is much easier, but not available in India, turn to foreign brokers to trade as they wish.

However, Indian traders do have certain liberties when it comes to forex trading, at least when compared to other European and Asian countries, where forex trading is heavily restricted or completely banned, such as North Korea or Ukraine. Given the financial changes India is going through, many believe forex regulations will also relax and limitations will become less and less of a concern.

This is why Indian traders need to keep themselves informed constantly, as to not miss financial opportunities that may arise. By constantly checking the news and keeping themselves educated, traders will learn how to navigate the market and make profits even in restricted environments. Successful traders know that, if you want to thrive, learning never actually stops. You constantly discover new trading strategies, learn how to manage risks, and how to effectively use stop losses to minimize losses. All of these things are paramount to master in such a decentralized and volatile market.