IMF's 17.7 billion SDR hides the decline in reserve pile-up in FY'22

Last fiscal year, India contributed $47.5 billion to its foreign exchange reserves, a decrease from the previous year by almost half. However, a closer look at the data indicates that the IMF's approval of Special Drawing Rights and the revaluation of gold holdings were responsible for roughly $26 billion of those additional reserves. Only $4 billion worth of hard foreign currency assets, net of value losses, were added to the FX pool.

The IMF increased the reserves by $17.7 billion in terms of SDR allocation and by about $9 billion in terms of gold value. The increases in foreign currency assets total $20 billion, even after eliminating the SDR gains ($17.4 billion), which are one-time, and movements in gold ($8.67 billion).

According to statistics on variation in foreign exchange reserves issued by the Reserve Bank of India, after accounting for value losses of $17.2 billion, foreign exchange reserves grew by $30.3 billion during 2021–22 as opposed to $99,2 billion during 2020–21.

According to an analysis of information from the RBI's Half Yearly Report on Management of Foreign Exchange Reserves, only $ 4 billion of the $30.3 billion increase in reserves in FY'22 to $ 607.3 billion was attributable to the accumulation of hard currencies, with the remaining $8.7 billion and $17.4 billion coming from increases in gold and SDRs.

"Accordingly, one way to interpret the relative moving parts is to see that gold reserve accretion has been high, so positive valuation effects were seen there, but FCA related valuation losses are much higher than $ 17bn due to weaker euro, JPY, and GBP in the last 12 months, according to Rahul Bajoria, chief India economist at Barclays Capital.

Foreign exchange asset movements are primarily caused by the Central Government's receipt of foreign aid, the RBI's purchases and sales of foreign currency, revenue from the use of foreign exchange reserves, and asset revaluation adjustments.

Data shows that our external sector is under stress without IMF help. According to Madan Sabnavis, chief economist of Bank of Baroda NSE 0.90 percent, "With the current account turning to deficit balance of payments pressured." "While FPI is negative, FDI has maintained its position. Consequently, the external account has become weaker ".

The slowdown in the accumulation of reserves takes importance since the potential of a greater current account deficit would put more pressure on the reserves and the currency. Foreign investment is stalling as central banks of major nations boost interest rates to combat rising inflation.

According to estimates, the current account deficit might increase from 1.2 percent of GDP in FY22 to 3.0 percent of GDP or possibly higher in FY23 due to rising cruf. "Increased commodity prices (we anticipate crude oil prices to average $105 per barrel in FY'23) and a slowdown in the global economy are likely to be to blame for CAD's decline. Both export growth and service revenue are projected to suffer from a downturn in world economic activity. However, we anticipate transfers to continue in FY'23 "According to an HDFC Bank NSE 0.75 percent study.