Foreign fund inflow pushes forex reserves

India's foreign exchange reserves have surged to an all-time high as foreign funds turned from net sellers to net-buyers in the Indian equity markets in 2019.

The forex reserves of India touched an all-time high of $455 billion on December 20, 2019, a growth of $43 billion (10.4%) from $412 billion at the end of March 2019. Contrary to this the forex reserves had dipped by $12.5 billion in FY 2019.

Of the total forex reserves as of date, 93% are held as foreign currency assets in major currencies followed by 6% in the form of gold. During the nine months of the current financial year, Foreign current assets (FCA) have increased to $422 billion as of December 2019, showing a growth of 10%.

On the other hand, gold assets rose to $27 billion in December, from $23.4 billion as of March-end.

According to experts, a higher inflow of foreign funds in the Indian markets has contributed to the surge in the forex reserves. Other than this, moderation in the trade deficit has also contributed to the increase in the forex reserves. The trade deficit has seen moderation from $134 billion during April-November, 2018 to $111 billion during the same period in the current fiscal.

"The rollback of certain taxation measures (after the same were announced in Budget in July 2019) along with government measures to reinvigorate demand in the economy has led to higher FPI inflows during this fiscal. In addition, consequent to the resumption of ultra-low interest rate policies by global central banks (namely US Federal Reserves and ECB) and relatively higher interest rates in India have led to higher FPI inflows," CARE Ratings said in a note.

During the year, foreign funds, which include both foreign institutional investors (FIIs) and foreign portfolio investors (FPIs) parked Rs 1 lakh crore in the equity markets, while another Rs 26,809 crore and Rs 8,996 crore in the debt and hybrid markets respectively.

On the contrary, during 2018, the FPIs and FIIs combined withdrew a net of Rs 33,014 crore from equities and Rs 47,795 crore from the debt markets -- as the year marked the worst outflow of foreign funds from Indian markets.

"There has been a re-allocations but with India yields still low, full flows are unlikely to start in the near term. Re-allocation has happened because there will be some monies invested in India because of global allocations and as a part of different Index ETFs," said Anubhav Shrivastava, Partner, Infinity Alternatives.

Some of the experts also attribute it to domestic measures also. "Domestic boost in the form of corporate tax cuts, a sectoral stimulus to real estate and policies for boosting consumption and reduced interest rates combined lead to massive inflows in the last quarter of this calendar year," said Umesh Mehta, Head of Research at Samco Securities.