With a robust forex reserve of nearly $654 billion, Finance Minister Nirmala Sitharaman is poised to present her seventh Budget in July 2024, marking the inaugural full budget of the newly formed Modi 3.0 government. Before delving into the specifics of the upcoming budget, it is crucial to understand key economic factors such as capital inflows, foreign exchange reserves (forex), and foreign portfolio investment (FPI), which play a significant role in shaping the economic landscape.
The Reserve Bank of India (RBI), in its annual report for FY24, highlighted robust capital flows driven by buoyant economic growth and improving domestic macroeconomic fundamentals. Notably, FPI flows saw a significant turnaround, reaching $41.6 billion in 2023-24, the second-highest since 2014-15’s $45.1 billion. Among emerging market economy (EME) peers, India received the highest net FPI inflows during the year.
“With overall net capital inflows outpacing the Current Account Deficit (CAD), there was an accretion to the foreign exchange reserves to the tune of $32.9 billion (on a balance of payments basis, i.e., excluding valuation effects) during April-December 2023,” stated the RBI report.
India’s foreign exchange reserves soared to an all-time high of $648.7 billion as of May 17, 2024, providing a cover of 11.4 months of imports and strengthening buffers against external sector risks and adverse spillovers. At the end of March 2024, forex reserves were placed at $646.4 billion, reflecting an increase of $68.0 billion over end-March 2023.
At end-December 2023, India’s foreign exchange reserves were five times higher than short-term external debt on an original maturity basis and more than twice short-term external debt on a residual maturity basis. “As of end-March 2024, foreign exchange reserves provided a cover of 11.4 months of imports for 2023-24,” according to the RBI.
The management of foreign exchange reserves, which provide a cushion against exchange rate volatility, was prudent throughout the year. However, as of June 14, 2024, India’s forex reserves contracted by $2.92 billion to $652.9 billion, according to RBI data. Previously, forex reserves surged by $24.3 billion to a record high of $655.8 billion for the week ending June 7, 2024.
As the government gears up for Budget 2024, existing policies in taxation, investment incentives, and welfare programs will be crucial. The principle of continuity and strategic realignment is likely to guide budgetary decisions, ensuring a seamless transition while addressing evolving economic demands. With a coalition government now in place, the budget must balance growth objectives with the priorities of coalition partners, aiming to maintain economic stability and foster development.
