'Higher forex reserves lower cost of foreign borrowings, hedging cost'

Mumbai: Higher foreign exchange reserves have lowered the cost of foreign borrowings and also the hedging cost for companies, according to a paper published in RBI's monthly bulletin. Since 2019, the RBI has been accumulating forex reserves that peaked at $642.453 billion in the week ended September 3, 2021, which was more than double the reserves at the end of December 2018.

At the peak, the reserves were good enough to cover 18 months of imports. Forex reserves were measured in terms of import cover, which no longer is the criteria. However, the reserves plunged by $14.272 billion in March 2022 alone as the rupee came under pressure due to capital outflow following a rise in interest rates in advanced economies and the Russia-Ukraine conflict.

"For India, higher reserve cover is observed to lower the cost of foreign borrowings and also the hedging cost,'' the article - Foreign Exchange Reserves Buffer in Emerging Market Economies: Drivers, Motives and Implications, said.

It's been authored by Dirghau Keshao Raut and Deepika Rawat from the RBI's Department of Economic and Policy Research. The central bank said the views expressed in the article are those of the authors and do not represent its perspective.

Accretion to India's reserves buffer in recent years had been an outcome of modest levels of current account deficit (CAD) relative to the size of net capital inflows. This is broadly in line with the trend observed across select emerging market economies in the post-Covid period, partly reflecting the impact of ultra-accommodative monetary policies in major advanced economies (AEs) in pushing capital to flow out in search of higher return, the article said.

The country's CAD recorded a sharp decline in 2019-20 and a surplus in 2020-21. On the other hand, the capital account recorded a surplus in both these years led by FDI.

Consequently, there was an accretion to foreign exchange reserves to the tune of $147 billion (on a BoP basis) during 2019-20 and 2020-21.