Capital flows post Covid-19 into India and foreign exchange management by India

Abstract

Covid-19, that hit India in early 2020, disrupted the economy, resulting in a nationwide strict lockdown from March 2020. Soon, India’s GDP contracted 23.9% in the first quarter of 2020- 21, the worst in 24 years. The Prime Minister, on May 12, 2020, declared the Special Economic and Comprehensive Package comprising of Rs. 20 lakh crores, equivalent to 10% of India’s GDP, as a part of the Aatmanirbhar policy. As measures were taken by the government on the fiscal side, the RBI also took a string of measures to preserve the health of financial markets and its participants. However, one interesting point to note amidst all the clamor is the sustained inflow of capital into India. Despite strict lockdowns, global investors pumped money into India during the pandemic, leading to huge increase in foreign exchange reserves. The below extract explains the changes that have occurred in the capital flows and foreign exchange reserves of India during Covid-19. It also describes the adequacy of foreign exchange reserves for India based on certain key parameters. Also, reserve management initiatives taken by the RBI have been compared to another economy- Turkey. Finally, the report ends with certain disadvantages of maintaining excess foreign exchange reserves and any avenues for creative deployment.