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Economic Survey 2022 : India's external sector ready to face expected drying up of global liquidity

Central Banks globally are expected to begin tightening their monetary policy and reduce liquidity in a bid to curtail rising inflation. In FY22, India became the fourth-largest forex reserves holder, after China, Japan, and Switzerland with a record $636 billion. However, India’s external debt rose to $ 593.1 billion in September 2021, from $ 556.8 billion a year earlier.

January 31, 2022 / 03:00 PM IST
Union Finance Minister Nirmala Sitharaman (Illustration: Moneycontrol)

Union Finance Minister Nirmala Sitharaman (Illustration: Moneycontrol)

India’s external sector is resilient enough to face any unwinding of global liquidity, as the likelihood of faster normalization of monetary policy by systemically important central banks, including the US Federal Reserve grows, the Economic Survey 2021-22 has said.

Faster normalization of monetary policy is expected from major central banks across the world, in response to elevated inflationary pressures, said the Survey that was tabled in both houses of the Parliament on January 31.

Monetary policy normalization means monetary tightening, which is a gradual progress and signifies that central banks globally will begin to withdraw the unconventional monetary policy measures they had deployed in order to battle the economic fallout of the Covid pandemic. Mostly, this had involved loose monetary policy restrictions and a push to inject liquidity into struggling national economies.

But now that runaway inflation is fast becoming a policy challenge globally, central banks are expected to reel in the amount of extra cash in the market.

At home, the Reserve Bank of India had begun back in October 2021 its own efforts at policy normalization, stating that the first step was to stop liquidity; while the second was to move liquidity from fixed-rate reverse repo to the auctions. However, these plans had hit yet another wall after the third wave of the pandemic emerged.


India’s current account balance turned into a deficit of 0.2 percent of GDP in the first half of 2021-22, largely led by a major deficit in trade account as exports had nosedived. However, the Survey pointed out that net capital inflows were higher at $65.6 billion in the first half, 'on account of continued inflow of foreign investment, revival in net external commercial borrowings (ECBs), higher banking capital and additional special drawing rights (SDR) allocation'.

Good and the bad

Meanwhile, the Survey noted that while there was a major increase in India’s foreign exchange reserves during 2021-22, the import cover, or the number of months of imports it can pay for, declined. India's reserves stood higher at $633.6 billion in end-December 2021, up from $577 billion in March 2021.

"However, the import cover of India’s foreign exchange reserves declined to 13.2 months at end-December 2021 from 17.4 months at end-March 2021 as merchandise imports increased with a pick-up in domestic economic activity," the survey noted.

Robust capital flows were sufficient to finance the modest current account deficit that India experienced in 2021-22. As a result, the overall balance of payments (BoP) reached a surplus of $63.1 billion in the first half of 2021-22.

Subsequently, this led to augmented foreign exchange reserves crossing the milestone of $ 600 billion, which touched $633.6 billion as of December 31, 2021. "As of end November 2021, India was the fourth-largest forex reserves holder in the world after China, Japan, and Switzerland," the Survey noted.

It added that this rise led to an improvement in external vulnerability indicators such as foreign exchange reserves to total external debt and short-term debt to foreign exchange reserves.

Meanwhile, it said India’s external debt rose to $ 593.1 billion in September 2021, from $ 556.8 billion a year earlier, reflecting additional SDR allocation by the International Monetary Fund, coupled with higher commercial borrowings.

Rising remittances

In the first half of FY22, total 'net private transfers' – mainly representing remittances by Indians employed overseas – grew by 7.2 percent to $38.4 billion, as compared to the corresponding period from a year earlier. However, it grew by a modest 0.1 percent over the first half of FY20. This indicates that remittance flows have stabilized to pre-pandemic levels.

As per the Migration and Development Brief 35, World Bank (November 2021), India continues to be the largest remittance recipient country in the world in 2021 (in current US dollar terms) and has been so since 2008. After bottoming out in the first quarter of FY21, net private transfers registered positive growth and amounted to $ 19.2 billion in the second quarter of FY22.

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Subhayan Chakraborty has been regularly reporting on international trade, diplomacy and foreign policy, for the past 6 years. He has also extensively covered evolving industry and government issues. He was earlier with Business Standard newspaper.
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