With India's Forex Up, Is RBI Planning to Kickstart the Economy?

Amidst global economic volatility and sluggish Indian economy, the Foreign Exchange Reserve held by the Reserve Bank of India (RBI) rose by 5% as on September 2019. Besides that, gold reserve, liquidity ratios, and volatility capital inflow have also improved marginally. RBI plans to conduct an indigenous ‘Operation Twist‘ to bring down longer-term yields.

Crux of the Matter

1. India’s Foreign Exchange Reserve rose to $433.7 bn as on September 2019 as against $412.87 bn on March 2019. In the month of December, Foreign Exchange Reserves crossed the $450 bn mark for the first time.

2. Compared to March 2019, in September 2019 Gold Reserve of India was up by 5.59% at 618.17 tonnes of gold, of which 325.87 tonnes was held overseas in safe custody.

3. India’s foreign exchange import cover improved to 10.0 months as on June 2019 from 9.6 months on March 2019. With the increase in Forex in December, the import cover increased to 11 months.

4. Volatile capital flows stood at 86.7% as on June 2019 as compared to 88.7% on March 2019, indicating an improvement in the policy mix of RBI to stabilize the volatility of capital flows in the emerging economy of India.

5. Following an attempt at stability, RBI is planning to conduct an indigenous ‘Operation Twist‘ to bring down yields of long-term securities.

6. As a part of the move, RBI will conduct an Open Market Operation (OMO) by buying securities worth Rs. 100 bn and selling four different bonds maturing in 2020. RBI seems to be setting up a floor for the economic slippage which may probably act as a trampoline for pushing the economy into revival.

Curiopedia

India’s Open Market Operation is much influenced by the fact that it is a developing country and that the capital flows are very different from those in developed countries. Thus India’s central bank, the Reserve Bank of India (RBI), has to make policies and use instruments accordingly. Prior to the 1991 financial reforms, RBI’s major source of funding and control over credit and interest rates was the cash reserve ratio (CRR) and the SLR (Statutory Liquidity Ratio). But after the reforms, the use of CRR as an effective tool was deemphasized and the use of open market operations increased. OMOs are more effective in adjusting market liquidity. The two type of OMOs used by RBI: 1. Outright purchase (PEMO) is outright buying or selling of government securities. (Permanent). 2. Repurchase agreement (REPO) is short term, and are subject to repurchase. More Info

Curated Coverage

1. RBI Report – Report on Management of Foreign Exchange Reserves

2. Livemint – India’s forex reserves rose 5% in H2FY20: RBI report

3. The Hindu – India’s forex reserves cross $450 billion for the first time

4. Economic Times – RBI brings in India’s version of ‘Operation Twist’ to lower yields

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