As India’s Forex Reserves Rise, America Keeps Watch

As the world’s 7^th largest economy in terms of GDP, only a little way behind France and well ahead of Italy, India’s is also reckoned to be one the fastest growing nations, surpassing even China. This rapid expansion has manifested itself in a number of ways and has even led to the IMF predicting that it will continue to grow at a rate of over 7% p.a. over the next few years.

Through the $400 billion barrier

A very notable effect of this buoyancy has been the continuing growth of the country’s foreign exchange reserves which for a long time had been hovering at around the $350 billion mark. For those not totally familiar with forex reserves, these consist of a number of elements which include assets in particular foreign currencies, reserves of gold, special drawing rights and reserves held within the International Monetary Fund which can be accessed if and when they’re ever needed.

Together, these create a considerable cash reserve to bolster the overall economy so it was with considerable pride that in the Reserve Bank of India’s weekly statistical round-up published on Friday, October 13th, it was able to show that over the course of the previous week there had been a rise of $1.50 billion taking the total value of the reserves from $398.79 billion to $400.29 billion.

This is not just good news for the economy, it’s also sure to create an extra incentive for a forex broker to include the Indian rupee in a pair of currencies that it could be profitable to trade. And, if one were looking for an ideal great option for the second currency of the pair, it could well be the Australian dollar. Already doing well, its value is currently being pushed even higher by the US Dollar’s weakness.

US concerns

"I’ve got my eye on you!" (CC BY 2.0) by peasap

Turning to America, as the world’s biggest economy, the country's Treasury takes a keen interest in the foreign exchange and economic policies of trading partners and, as India has a major bilateral goods trade surplus with the US which totals over $23 billion, they are firmly in their spotlight.

There are fixed protocols that are in place for when they believe intervention is needed and these are triggered when three criteria are met. The first is when there is a bilateral trade surplus of more than $20 billion. The second is when there is a current account deficit with the US amounting to a minimum of 3% of GDP and the third is when there are repeated purchases being made of any foreign currency which come to more than 2% of the country’s GDP over 12 months.

Looking to the future

In a report put together by the Treasury it was noted that India was very close to meeting all three criteria and, if they do trigger action, it will certainly lead to discussions about the effects that this could have on current and future trade agreements between the two countries.

But, with the strong rupee and the weaker dollar, it is already starting to affect exports so in the months to come this could turn into quite a tricky situation for the Reserve Bank of India to resolve – and only time will tell how they fare.