The decline in India’s foreign exchange reserves is largely due to the valuation changes arising from an appreciating U.S. dollar, Union Finance Minister Nirmala Sitharaman said.
She made the remarks while addressing the International Monetary Finance Committee (IMFC) during the ongoing annual meeting of the World Bank and the International Monetary Fund (IMF) here on Friday.
“India’s foreign exchange reserves at $537.5 billion as of September 23, 2022, compare favourably with most peer economies. Two-thirds of the decline in reserves is due to valuation changes arising from an appreciating U.S. dollar and higher U.S. bond yields,” Ms. Sitharaman said.
Indeed, there has been an accretion of $4.6 billion to the forex reserves in Q1:2022-23 on a balance of payments (BoP) basis. Other external indicators like net international investment position and short-term debt also indicate lower vulnerability, she said.
In fact, India’s external debt to GDP ratio is the lowest among major emerging market economies (EMEs), she added.
India’s forex reserves dropped by $4.854 billion to $532.664 billion as of September 30, according to the Reserve Bank of India (RBI).
The drop in the reserves for the week that ended on September 30 was on account of a dip in the Foreign Currency Assets (FCAs), a major component of the overall reserves, the Weekly Statistical Supplement released by the RBI stated.
According to Ms. Sitharaman, elevated imported inflation pressures remain an upside risk for the future trajectory of inflation, amplified by the continuing appreciation of the U.S. dollar.
Indeed, inflation has ruled at or above the upper tolerance limit of 6% since January 2022, she said.
In this context, Ms. Sitharaman said, calibrated withdrawal of monetary accommodation has continued to restrain the broadening of price pressures, anchoring inflation expectations and containing the second-round effects. India is better placed than many other advanced or emerging market economies, she said.
Ms. Sitharaman said the soft interest rates regime during the COVID-19 years helped corporates restructure their debt and reduce interest costs. Their debt-equity ratios have since fallen to 0.5. The reduction of the corporate tax rate in the pre-COVID-19 phase also helped corporates absorb the pandemic shock.
Similarly, the banking sector has posted six-year lows on non-performing assets (NPAs) and slippage ratios, while capital to risk-weighted assets ratio (CRAR) and provision coverage ratio (PCR) has moved up, she said.
India also sees strong credit growth at 15% in September 2022. The total resource flow to the corporate sector so far is five times that of last year’s mobilisation, mainly by way of bank credit, CPs and FDI, she said.
“India among very few standout performers in a world of uncertainties”
In a world of uncertainties, India is one of the very few standout performers, Ms. Sitharaman said, a day after the International Monetary Fund described the country as a bright spot in a global economy which is facing an imminent recession.
“In a world of uncertainties, India is one of the very few standout performers,” the minister said.
She said India’s National Statistical Organisation (NSO) has now placed the GDP growth for Q1 of the current financial year 2022-23 at 13.5% on a year-on-year basis – the highest among the large economies.
Ms. Sitharaman said this was achieved despite the fact that India started the monetary normalisation process quite early: surplus liquidity is being absorbed with the Standing Deposit Facility instituted in April 2022 and interest rate hikes from May this year.
The central government, she noted, is on a consolidation path and has budgeted to prune the GFD-GDP ratio to 6.4% from 6.7% in 2021-22 and 9.2% in 2020-21.
Further, government expenditure is now tilted towards capital rather than revenue, strengthening the foundations for medium-term growth, she added.
According to Sitharaman, touching 13.5% GDP growth in Q1 enabled India to cross the pre-pandemic level by 3.8%. India has completely withdrawn from lockdowns since April 2022.
“So, we see consumer spending picking up at 26% in Q1. This is made possible by bolstering consumer confidence and revival of contact-intensive activities. But still, there’s scope for improvement as the key trade, hotel, restaurant GVA is yet to cross the pre-pandemic level,” Ms. Sitharaman said.
On the investment side, she said, gross fixed capital formation (GFCF) growth shot up to 20% in Q1, driven largely by governments and public sector undertakings (PSUs) in the transport sector as also by housing, construction, steel, pharma and IT in the private sector.
This growth is also reflected in proximate indicators– cement, steel, IIP capital goods, non-gold and non-oil imports, and capacity utilisation.
“Both exports and imports are growing at double digits but import growth is more robust than that of exports, reflecting the revival of the domestic economy and the divergent slowdown in the global economy,” Ms. Sitharaman said.
“‘Tense’ and ‘uncertain’ geopolitical environment could trigger supply concerns in the winter for crude and natural gas”
Ms. Sitharaman on Friday warned that the “tense” and “uncertain” geopolitical environment could trigger fresh supply concerns in the winter for critical commodities such as crude and natural gas, but exuded optimism over India’s economic outlook on the back of robust macroeconomic fundamentals and structural reforms undertaken by the government.
The Russia-Ukraine war has had a far-reaching impact on the global energy system, disrupting supply and demand patterns and fracturing long-standing trading relationships.
It has pushed up energy prices for many consumers and businesses around the world, hurting households, industries and entire economies of several nations.
Ms. Sitharaman encouraged the World Bank Group to explore innovative ways to mobilise resources to unleash its capacity as a Knowledge and Solutions Bank and leverage its global convening power to assist all client countries to the maximum in pursuit of its twin goals.
“The geopolitical environment remains tense and uncertain. This could trigger fresh supply concerns in the winter for critical commodities such as crude oil and natural gas. Inflation control would be a major concern in the developed economies,” she said.
“A reality check on the part of stock markets in the developed world could bring back growth chills everywhere. However, the outlook for the Indian economy’s growth remains optimistic on the back of strong macroeconomic fundamentals and structural reforms and initiatives undertaken by the government,” Ms. Sitharaman said.
The latest annual meeting of the IMF and the World Bank, she said, offers a timely opportunity to put our heads together and think about how to navigate the headwinds caused by the ongoing multiple crises, including the lingering effects of the pandemic.
“Indeed, our deliberations can usher a silver lining for the global economy amidst mounting inflationary pressures, currency depreciations, rising debts and shrinking fiscal space,” she noted.
Ms. Sitharaman said the endangering of food and energy security coupled with the tightening financial situation and increasing interest rates pose massive challenges to its efforts to bring back long-term growth and to reverse the development setbacks caused by the pandemic.
“Our foremost collective priority must be to adopt a people-centric approach driven by innovation, to nurture new growth drivers and to bring the 2030 Agenda for Sustainable Development back on track,” the finance minister said.
The Purchasing Managers Index (PMI), which is a measure of the prevailing direction of economic trends in manufacturing, touched an 8-month high in July and continues to remain in the expansion zone for September 2022 with marked gains in growth of new business and output, the minister asserted.
“Nonetheless, the momentum may be challenged if merchandise exports, which have fallen to a nine-month low in September 2022, do not recover to their earlier high levels, as slowing growth in advanced economies is set to weaken cross-border trade,” she added.