India has strong forex reserves to face macro difficulties despite the recent fall: S&P

• S&P Global Ratings has pointed out that most emerging markets are facing broad-based external pressures like high commodity prices and dollar dominance.
• However, the agency believes that India is still in a better position amongst its peers.
• No material near-term pressure to its creditworthiness.

A report by the US-based rating agency S&P Global Ratings has pointed out that emerging markets are facing broad-based external pressures from higher commodity prices, US dollar dominance, and tightening financial conditions.

India is no exception, with hallmarks of these factors including a higher current account deficit and higher domestic inflation rates.

However, India is still in a better position among peers. “The key differentiator for India continues to be that the country is facing these challenges, these stresses from a position of relative strength,” said Andrew Wood, director of sovereign and international public finance rating.

He said that India has some buffer built-up against cyclical difficulties. It implies no material near-term pressure to its creditworthiness.

“We have noted since early pandemic phase India became a net creditor to the world. And what it means is that the country has built up buffers against cyclical difficulties like those, which we are experiencing right now," Wood said.

India's foreign exchange reserves stood at $570 billion as on August 12. It came down by $70 billion from the $642 billion it held as on September 3, 2021.

There has been a decline in India’s gross foreign exchange reserves in recent months due to falling Rupee value against the dollar and high crude oil prices.

Yet, if these reserves are compared to its historic reserves over the past 20 years, on a nominal value basis, it is high, as per Wood.

Moreover, Wood said that he expects the reserves to recover moderately to around $600 billion by the end of this year, and remain relatively flat over the next few years.

Emerging markets are facing several macroeconomic challenges, but a global rating agency believes that India can survive the phase, thanks to its low external debt and strong forex reserves.

Wood also said India has a strong external balance sheet and limited external debt.

Latest foreign exchange reserves data
Source: The Reserve Bank of India

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