75 years of independence: How India became country with 4th largest forex reserves

India remains the country with the fourth highest foreign exchange reserves in the world. The Reserve Bank of India (RBI) governor Shaktikanta Das made a statement regarding the same earlier this month as the central bank announced its third consecutive hike in policy rates.

According to reports, India’s forex reserves stand at $573.875 billion in the week ending 29 July. This marked an increase of $2.315 billion after a four-week falling trend in the reserves. The RBI has undertaken a slew of measures to ensure that India’s forex reserves remain high.

However, this was not always the situation. Soon after independence, the country’s forex reserves were at $1.82 billion. By 1961-62, the forex reserves had declined to $0.82 billion.

From then on, the reserves did grow slowly to $1.19 billion in 1971-72, $4.39 billion in 1981-82 and ultimately $9.22 billion in 1991-92.

However, ballooning external debt meant that the nation had forex reserves for just a few weeks. It was in this situation that the new government, headed by P V Narasimha Rao, decided to liberalise the economy to resolve the balance of payments crisis.

What happened next?

After the policy of economic liberalisation was unveiled by then Finance Minister Dr Manmohan Singh in 1991, India’s forex reserves grew exponentially. According to data by the Press Information Bureau, India’s forex reserves grew over 60 times since the 1990s to reach $607 billion by November 2021.

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What is the importance of forex reserves?

Forex reserves are a cushion against unforeseen external shocks, sudden stops in capital flow and economic volatility. The war in Ukraine has led to a sudden spike in the price of food grains and edible oils. The situation was also compounded by ships with Ukrainian grain being unable to move out of the region due to the conflict. While these ships have been able to deliver grain now, the prices have yet to fall back to the pre-war level.

Several countries have seen their forex reserves decline over the past few years due to the coronavirus pandemic as well as the ongoing war. This in turn has made them vulnerable to debt. Sri Lanka is one example. Untenable economic policies, coupled with lack of tourists, the pandemic and rising prices of imports like food and fuel, led the island nation to its worst economic crisis since it gained independence in 1948.

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