The Indian forex market has witnessed a high degree of volatility in the past few years in the aftermath of the East Asian crises as well as 9/11 attacks. However, developments taking place in the Indian forex market have brightened the prospects for the Indian economy significantly in the current financial year. These circumstances have been supported by the upsurge in the forex kitty of the country touching the levels of USD 116 billion as on April 09, 2004.
As a consequence, the Indian rupee has been appreciating steadily, which in turn has led to faster repatriation of export earnings and remittances by expatriates. The appreciation in the rupee rose to 4.7% for the calendar year 2004. The outlook for the current financial year is viewed with confidence throughout the industry following a sharp rise in agricultural production as well as achievement of a two digit GDP growth of 10.4% in the third quarter of the financial year 2003-04.
A rising rupee helped in reducing the burden of the foreign debt on both the government and Indian corporates. Now, Indian corporates, like Bharti group are taking advantage of the soft US interest rates and raising foreign currency loans, known as External Commercial Borrowings (ECBs). An appreciating rupee also helps importers to buy goods and services at a cheaper rate that before. This is imperative for a developing country like India that relies heavily on imports. Exports have gone up significantly in the last two fiscal years, as have imports, indicating a prosperous future for the Indian economy as higher imports normally mean enhanced economic activities taking place in the country.
According to the governor of the Reserve Bank of India (RBI), Dr. Y.V. Reddy, the Indian rupee is relatively stable compared to other international currencies. Dr. Reddy said, "Volatility is not easy to define and I always said the broader line between flexibility and volatility is rather waving and shifting. The rupee value has to be seen in the context of supply and demand, both in the country and across currency movements globally."
Burgeoning Forex Reserves: Contribution of Foreign Institutional Investors (FIIs)
The major contributor to the forex kitty of the country in the first three quarters of the fiscal year 2003-04 had been foreign investments. The total foreign investment was 38.3% of the reserves out of which 9.5% was foreign direct investment and 28.8% was portfolio investments by the FIIs. The total addition to the kitty was $26.4 billion as compared to $16.3 billion during the first three quarters of the fiscal year 2002-03. Moreover, the Indian forex kitty exceeded the total external debt of the country. On April 9, 2004 the total forex reserves stood at $116 billion and the total external debt was $112 billion.
After the FIIs, it is the banking sector (and its capital) that topped the list of the major contributors. Banking capital contributed a whopping 21.3% to the forex reserves, including net inflows to the tune of $3.4 billion from NRI deposits. Shot term credit accounted for 9.1% of the reserves. Valuation gains registered a whopping 20.5% coming to $5.6 billion as compared to $3.7 billion for the same period in the fiscal year 2002-03.
There is no doubt that foreign institutional investor inflows into the Indian capital markets has led to a sudden upsurge in the forex reserves of the country. The initial public offers (IPOs) too played a key role in this.
India's growth potential is now far more widely recognized than ever before. In the 1990s, the majority of foreign inflows were from the remittances made by the Indian workers working in the Gulf region. But now the picture is quite different. Foreign investment only has contributed more than $10 billion dollars into the Indian economy during the period Apr-Dec 2003. Moreover, the non-resident Indian (NRI) community - which moved far and wide during the IT boom - are now beginning to transfer their savings back home.
The Indian software community has gained a tremendous reputation abroad, attracting many foreign companies to set up the call centers and information technology enabled services (ITES) in India.
Robust Service Exports
Total exports between Apr-Jan of the fiscal year 2003-04 were valued at $47502.50 million, a growth of 12.83% over the previous year, while imports were valued at $61933.02 million - a growth of 24.70% over the same period in the last fiscal year. Consequently, the trade deficit for Apr-Jan 2003-04 is estimated at $14430.52 million, much higher than the deficit of $7566.59 million during the same period in the fiscal year 2002-03. In spite of such a high trade deficit, the overall current account balance of the country doubled in the third quarter of the fiscal year 2003-04 to $1.8 billion over the same period in the previous fiscal year. Much of this can be attributed to the splendid performance of the Indian software industry as well as tourism.
RBI: The 'Stabilizer'
The central bank of a country is always ready to mop up any enduring liquidity in the markets. When it comes to India, the Reserve Bank of India has already taken initiatives to absorb the excess liquidity in the money markets. The Apex Bank has come out with a scheme known as the 'Market Stabilization Scheme (MSS)' through which the central bank will be issuing bonds in the market in an order to mop up surplus liquidity as and when required. The total corpus for the MSS scheme is Rs 60000 crore that would be issued in the fiscal year 2004-05. The Apex Bank has already issued securities worth Rs 10000 crore so far in the second week of April'04 and another issue of MSS bonds will take place on April 27 by the RBI. Clearly, the central bank is acting as a stabilizer to smooth out the volatilities in the money markets.
Conclusion
It's a matter of pride and a cause for celebration that India has made the transition from a market facing the BoP crises to one with official forex reserves of more than $116 billion. The RBI has done an admirable job of managing the external liquidity and debt position of the country. Recent developments in the Indian money and forex markets have brightened the prospects for the forthcoming economy of the country significantly. The outlook for the current financial year is one of confidence, following the recent upsurge in the forex kitty, GDP growth and growing current account surplus.
Courtesy - Vivek Jain - ICFAI
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