Foreign Portfolio Investments Current Affairs - 2020

India’s Forex reserves rise to a record high of $426.42 billion

As per the data revealed by Reserve Bank of India (RBI), India’s foreign exchange (Forex) reserve rose to a life-time high of $426.42 billion (in week to 21 June 2019) after it surged by $4.215 billion boosted by higher foreign portfolio investments (FPI) and a stable rupee.

Key Highlights

Background: Earlier, the Forex reserves had scaled a record high of $426.028 billion in week to 13 April 2018. Since then it had been fluctuating and had even fallen by more than $35 billion, as monetary authority had been heavily intervening in market to salvage Indian rupee, which was worst performing currency in Asia throughout 2018.In previous reporting week (prior to June 21), reserves had declined by $ 1.358 billion to $422.2 billion.

India’s reserve position with International Monetary Fund (IMF) also rose by $9.6 million to $3.354 billion.

Reason: This rise in reserves was on account of increase in foreign currency asset, which is a major component of overall foreign exchange reserves of the country.

Foreign Currency Assets: expressed in terms of dollars includes effect of appreciation or depreciation of non-US units such as British pound, the Japanese yen and euro held in forex reserves. In reporting week of 21 June, foreign currency assets increased by $4.202 billion to $398.649 billion.

Gold Reserves: remained unchanged at $22.958 billion.

Special Drawing Rights (SDR): with IMF increased by $4.2 million to $1.453 billion. India’s reserve position with the fund also rose by $9.6 million to $3.354 billion..

Significance: According to market experts, with $427 billion, reserves can take care of imports for almost 10 months.

About Foreign Reserves

It is the reserve assets held by a central bank of country in foreign currencies which can act as a buffer and can help economy in challenging times. It can also be used to back liabilities on their own issued currency and to influence monetary policy of the country. Almost all countries across the world, regardless of size of their economy, hold significant forex reserves.

Importance: Forex reserves are one of the key revenue earning sources for a country central bank, which invests money in foreign government bonds and also with IMF and other secure investment class.

India’s FOREX Reserves includes components:

  1. Foreign currency assets (FCAs)- It constitutes largest component of Indian Forex Reserves and are expressed in US dollar terms.
  2. Gold Reserves
  3. Special Drawing Rights (SDRs)
  4. Reserve Tranche Position (RTP) of RBI with International Monetary Fund (IMF).

Higher forex reserves are must for a fast-growing economy such as India with higher imports and lower export earnings.

RBI takes masala bonds out of corporate bond limit for FPIs

The Reserve Bank of India (RBI) has increased corporate bond investment limit for foreign investors by taking out Masala bonds (rupee-denominated bonds) from ambit of total debt investment limit. They will be considered as part of External Commercial Borrowings (ECBs) and will be monitored accordingly.

Key Facts

Currently, masala bonds are reckoned both under combined corporate debt limit (CCDL) for FPI (Foreign Portfolio Investments) and external commercial borrowings (ECBs). At present, limit for investment by FPIs in corporate bonds is Rs. 2,44,323 crore. It includes issuance of rupee-denominated bonds (RDBs) overseas by resident entities of Rs 44,001 crore (including pipeline). The amount of Rs 44,001 crore arising from shifting of Masala bonds will be released for FPI investment in corporate bonds over the next two quarters.

Background

With surge in inflows in Indian debt markets in current year, cumulative utilisation of FPI limit in corporate bonds stood at 99.07% as on September 2017, reflecting limited scope of further FPI investments. The revised limit is expected to allow FPIs to make additional investments of a similar amount in corporate bonds.

Masala bonds

The Masala bonds refer to rupee-denominated bonds through which Indian entities can raise money from foreign markets in rupee, and not in foreign currency. Basically, they are debt instruments used by corporates to raise money from investors. The issuance of rupee denominated bonds, protects Indian entity against risk of currency fluctuation, typically associated with borrowing in foreign currency. It also helps in internationalization of the rupee and in expansion of t Indian bond markets. These bonds are usually traded on the London Stock Exchange (LSE) and not in India.