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External Sector 105

to be the top investing country in terms of FDI equity inflow while USA occupies the second The quarterly trends in major components of India’s balance of payments is depicted in Annexure
position. The list of top five FDI sectors and investing countries is given in Annexure IV. V. While the BoP surplus in Q1: FY 22 was on account of surplus in current as well as capital
account, BoP surplus in Q2: FY 22 was on the back of larger surplus on capital account more
3.44 The latest aggregate data on FPI is available till December 2021. As depicted in Figure than compensating the deficit on the current account (Figure 17a).
16, FPI flows remained volatile due to global uncertainties relating to US monetary policy
normalisation, rising global energy prices, fear of new variants of COVID-19 and strong Figure 17: Overall BoP Balance and Forex Reserves
inflationary pressures. While the debt market witnessed net purchases during April-December,
2021, valuation concerns and profit booking by portfolio investors led to outflows from the a. Surplus in BoP balance b. Augmented forex reserves and Import Cover
Indian equity market, leading to net FPI outflow of 0.6 billion, vis-à-vis net FPI inflow of US$ Capital A/c Current A/c BoP balance to GDP (RHS) 700 FER Import Cover (RHS) 20
28.5 billion in corresponding period a year earlier. 60 6 611 635 634
32.5 31.2 5 600 586 577 16
Figure 16: Foreign Portfolio Investment remained volatile 40 14.0 21.6 31.6 31.9 4 506 545 12

Debt Equity Total FPI US$ BIllion 20 5.1 18.8 19.8 3.4 3 Per cent of GDP US$ Billion 500 430 434 460 478 8 No. of months
30 2
21.1 0 1 400 4

20 -20 0 300 0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2021-22 (P) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
Q1
Q2
7.6
US$ Billion 10 0.5 5.9 0.5 0.3 5.0 Source: RBI 2019-20 2020-21 2021-22 (P)
7.0
5.9
2020-21
2019-20
Note: (i) The forex reserves indicated above are as at end date of the quarter.
0
(ii) The reserve cover of imports for Q3 2021-22 is provisional and will change once quarterly BoP is released.
(iii) P: Provisional
-10 -5.9 3.47 There was a massive increase in India’s foreign exchange reserves during 2021-22. The forex
reserves stood higher at US$ 633.6 billion as at end-December 2021, than US$ 577.0 billion as
-20 -14.5 at end-March 2021. However, the import cover of India’s foreign exchange reserves declined to
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 13.2 months at end-December 2021 from 17.4 months at end-March 2021 as merchandise imports
2019-20 2020-21 2021-22 (P) increased with pick-up in domestic economic activity (Figure 17b). As at end-November 2021,
5
Source: National Securities Depository Limited (NSDL). India was the fourth largest foreign exchange reserves holder in the world after China, Japan and
Note: (i) Total net FPI is summation of debt, equity, hybrid and voluntary retention route (VRR), however, only Switzerland.
debt and equity are depicted in above chart as they together account for more than 90 per cents of the total net FPI.
Balance is hybrid and VRR. 3.48 The current account deficit in the BoP determines how much of net capital inflows into the
(ii) P: Provisional
3.45 Among other forms of capital flows, banking capital recorded net inflow of US$ 4.4 billion country can be absorbed or used for growth. It is expected to be within the manageable limits
during 2021-22. From a historical perspective, India can sustain a current account deficit of
in H1: FY 22 as compared with a net outflow of US$ 9.0 billion in corresponding period a year 2.5-3.0 per cent of GDP without getting into an external sector crisis. 6
earlier, notwithstanding lower net inflows under Non-Resident Indian (NRI) deposit accounts.
With fresh disbursals exceeding repayments, net disbursement of ECBs (i.e., adjusted for inter- MOVEMENT IN EXCHANGE RATE
corporate borrowing) was at US$ 4.7 billion in H1: FY 22.
3.49 Indian rupee depreciated by 4.5 per cent (y-o-y basis) against US dollar in 2020-21.
BOP BALANCE AND FOREIGN EXCHANGE RESERVES Although the rupee exhibited movements in both directions against US dollar during April-
December, 2021, it depreciated by 3.4 per cent in December 2021 over March 2021. The
3.46 As elaborated earlier, India’s current account balance switched into a deficit in H1: FY 22 depreciation of the rupee, however, was modest as compared with its emerging market peers,
on the back of widening of trade deficit, reflecting amongst other reasons, a broad-based revival such as Turkish lira, Argentine Peso, Thai baht, and Philippine peso (Figure 18). The rupee
of aggregate demand. However, this current account deficit (CAD) was adequately cushioned appreciated against euro, Japanese yen and pound sterling by 1.8 per cent, 1.3 per cent and 0.6
by robust capital flows, resulting into an overall balance of payments (BoP) surplus of US$ 63.1 per cent, respectively, in December 2021 over March 2021.
billion in H1: FY 22. This led to an augmented foreign exchange reserves crossing the milestone
of US$ 600 billion and touching US$ 635.4 billion as at end-September 2021. 5 Import cover is calculated based on import data (BoP basis) for latest four quarters. For Oct-Dec 2021, provisional import data as provided by
DGCIS is used.
6 Patra, M D (2021): Growth and Development in the BRICS Economies, RBI, Bulletin, December