India builds up forex reserves
According to a Credit Suisse research report, with countries led by China focusing on accumulating assets abroad rather than increasing foreign exchange (forex) reserves, global forex reserves as a share of GDP have fallen from 15.4 percent of GDP to less than 14 percent in the last six years. To avoid currency appreciation, countries such as India and Switzerland accumulated reserves rather than investing in foreign assets.
Global reserves grew steadily from US$ 2 trillion in 1999 to US$ 12 trillion by 2014, but then plateaued. “As a share of global GDP, they have risen from 5.5 percent in 2000 to 15.4 percent in 2014, but they are now below 14 percent,” according to Credit Suisse.
Without the purchases of dollar assets by Switzerland and India to prevent the Swiss franc and rupee from appreciating, global forex reserves would have fallen in absolute terms as well. According to a Credit Suisse (Securities) India report, reserves have fallen sharply in China and Saudi Arabia, which are now investing in assets abroad rather than accumulating forex reserves, and have grown slowly in the majority of countries.
Forex reserves are a country’s foreign assets held in liquid form by the central bank as insurance against financial shocks. As of April 8, 2022, India’s forex reserves stood at $ 604 billion.
According to the report authored by Credit Suisse analysts Neelkanth Mishra, Prateek Ancha, and Abhay Khaitan, the rise in Switzerland and India has less to do with sequestering the country’s savings into safe assets and more to do with protecting the local currency from appreciating against the USD.
China and Saudi Arabia are two examples of countries that went above and beyond what was required as insurance and shifted their foreign asset mix away from currency reserves. This diversification increased safety and promised better returns, whether financial or geopolitical, according to the report.
Countries are diversifying and optimising their foreign assets, according to Credit Suisse. China and Saudi Arabia continue to amass foreign assets, albeit not as currency reserves.
Over the last decade, reserves as a percentage of China’s foreign assets have fallen from 70% in 2010 to less than 40% today. In Saudi Arabia, the drop was from more than 60% to less than 40%.
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