What is the significance of rising FDI and forex reserves amid lockdown?

New Delhi, June 11: The total foreign direct investment (FDI) into India jumped by 18 per cent to $73.46 billion in the 2019-20 financial year, the highest in four years, according to data released by the Department for Promotion of Industry and Internal Trade (DPIIT) last week. Of this FDI equity inflows through the Foreign Investment Promotion Board (FIPB), RBI’s automatic route of through acquisition rose 13 percent to around $49.98 billion.

 

 

 

The sectors that attracted the most foreign inflows during 2019-20 included services $ 7.85 billion, computer software and hardware $ 7.67 billion, telecommunications $ 4.44 billion, trading $ 4.57 billion and automobiles $ 2.82 billion. Meanwhile, Singapore has once again emerged as the largest equity FDI source, contributing to inflows of $14.67. But a more surprising fact is India's increase in the FDI inflow in the midst of decreased GDP estimates, economic slowdown and now the lockdown.

 

Unlike in 1991, when India had to pledge its gold reserves to stave off a major financial crisis, the country can now depend on its soaring foreign exchange reserves to tackle any crisis on the economic front. While the situation is gloomy on the economic front with the GDP growth in the contraction mode for the first time in 40 years and manufacturing activity and trade at standstill, there’s still some reason to cheer about amidst the raging Covid-19 pandemic as India’s foreign exchange reserves are also rising and are slated to hit the $500 billion mark soon.

 

 

The major reason for the rise in forex reserves is the rise in investment in foreign portfolio investors in Indian stocks and foreign direct investments (FDIs). Foreign investors had acquired stakes in several Indian companies in the last two months. After pulling out Rs 60,000 crore each from debt and equity segments in March, Foreign Portfolio Investments (FPIs), who expect a turnaround in the economy later this financial year, have now returned to the Indian markets and bought stocks worth over $2.75 billion in the first week of June.

 

Forex inflows are set to rise further and cross the $500 billion as Reliance Industries subsidiary, Jio Platforms, has witnessed a series of foreign investments totaling Rs 97,000 crore. On the other hand, the fall in crude oil prices has brought down the oil import bill, saving the precious foreign exchange. Similarly, overseas remittances and foreign travels have fallen steeply, down 61 per cent in April from $12.87 billion. The months of May and June are expected to show further decline in dollar outflows, the statement read.

 

The rising forex reserves give a lot of comfort to the government and the Reserve Bank of India in managing India’s external and internal financial issues at a time when the economic growth is set to contract by 1.5 per cent in 2020-21. It’s a big cushion in the event of any crisis on the economic front and enough to cover the import bill of the country for a year.