After a difficult 2022-23, which saw the rupee depreciate and hit new lows against the US dollar, the currency stabilised in 2023-24 and allowed the Reserve Bank of India (RBI) to replenish its foreign exchange reserves. In fact, as on January 12, the Indian central bank's forex reserves stood at $619 billion as against $578 billion at the end of 2022-23 and $607 billion a year before that.
That India's forex reserves are only $20 billion or so away from their all-time highs speaks volumes given that global geopolitical risks have not receded over the last one year; in fact, they have only increased.
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But what has stood out in 2023-24 is India's robust growth performance. And the external position, despite the monthly merchandise trade deficit hitting record highs during the year, is set to get stronger thanks to the addition of Indian government bonds in global indices. In September 2023, JPMorgan announced India's inclusion in its Government Bond Index-Emerging Markets (GBI-EM) global index suite with effect from June 2024. According to economists, this could result in foreign inflows of $20-25 billion over a 10-month period.
It didn't end there. On January 9, Bloomberg Index Services proposed the inclusion of Indian sovereign debt in its indices starting September 2024.
"Given India's inclusion in global bond index, we expect capital flows to be in excess of the CAD (current account deficit) financing requirement, resulting in a Balance of Payments (BoP) surplus in 2024-25," said Kaushik Das, Deutsche Bank's chief economist for India & South Asia.
"However, net FDI flows have reduced sharply, and this could pose a problem for the BoP, in case volatile FII inflows were to disappoint at any point of time," Das added.
Trade flows must also be considered, with the world economy expected to slow down further next year. This could hurt India's exports and widen the trade deficit. However, the government has been working on diversifying its export destinations and import sources so that the country can better weather global uncertainty. All in all, India's external buffers – already seen as a key strength – may only get stronger.
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