New reform agenda has bolstered Indian economy, says U.S.

Country’s total foreign exchange reserve has reached an all-time monthly average high of $328 billion: Treasury Department report

October 20, 2015 10:49 am | Updated April 01, 2016 12:29 pm IST - WASHINGTON:

Amid weaker outlook across emerging market economies, India’s recovery has strengthened under a new reform agenda, but it is not yet a “major driver” of global growth, a U.S. Treasury Department report has said.

Buoyed by savings of $44 billion from drop in prices of oil imports, India’s total foreign exchange reserve has reached an all-time monthly average high of $328 billion — thus making it the eight country from the top in terms of foreign reserve — the U.S. Department of Treasury said on Monday in its semi-annual “Report to Congress on International Economic and Exchange Rate Policies.”

‘Weaker outlook evident’

In its report, the Treasury has said weaker outlook is evident across emerging market economies, which exerts a growing influence over global economic prospects. The slowdown in domestic Chinese investment and Chinese demand for imported commodities and components is having wide-ranging implications for other economies, it said.

“On a positive note, India’s recovery has strengthened under a new reform agenda since it is not a large importer; however, it is not yet a major driver of global growth,” the Treasury said.

Recession again in Brazil

While Brazil is entering its second year of recession and will not be a source of growth in Latin America, Russia is struggling due to economic mismanagement, lower oil prices and the impact of economic sanctions, it has said.

According to the report, the sharp drop in the price of oil is having a large impact on global current account imbalances. On an annualised basis, the roughly $50 per barrel decline in the price of oil is generating shifting income of over $600 billion annually from oil exporters to oil importers, holding all else constant, with Europe and Asia the key beneficiaries.

Low oil rate benefits Asia

“Asia benefits the most from a lower oil price. Asia’s gain in the first half of the year was nearly $340 billion in savings from oil imports. China’s savings amounted to nearly $120 billion — the largest single country gain from lower oil prices. Japan saved $76 billion, India $44 billion, and Korea $36 billion,” the report said.

The Treasury has said in many cases, this shift is boosting already very large current account surpluses: Germany’s surplus is projected to rise to 8.5 percent of GDP this year, or around $335 billion; Korea’s surplus is on track to be around eight per cent of GDP; and Taiwan’s surplus is well over 10 per cent of GDP.

Though significantly lower than its 10 per cent of GDP peak in 2007, China’s current account surplus in the first half of 2015 topped three per cent of GDP and the full year surplus is likely to reach $350 billion.

Adding to national incomes

“These growing surpluses have added to national incomes in parts of Asia and Europe, but demand growth in Europe remains too sluggish and has weakened in Asia. Rather than absorb demand from the rest of the world, economies with large current account surpluses should take supplemental policy actions, including fiscal actions, to provide added support to domestic demand and give impetus to global rebalancing,” the report said.

Because of drop in oil prices, the United States’ oil import bill was nearly $110 billion lower in the first half of the year. Euro area economies saved nearly $142 billion, it said.

Foreign-currency reserves

According to the report, global foreign-currency reserves declined in dollar terms in the first half of 2015, due entirely to valuation effects associated with non-dollar exchange rate depreciations.

Measured foreign exchange reserves fell over $200 billion in the first half of 2015. Once the impact of exchange rate adjustments are taken into account, however, allocated reserves appear to have increased, it said.

China a seller of reserves

Based on changes in China’s headlines reserves adjusted for exchange rate changes, balance of payments data, and proxies for Chinese reserve growth followed by the market, China is widely understood to have been a seller of reserves in the first half of 2015, though China’s reserves remain at a very high level relative to the rest of the world.

Similar estimates of Korean foreign exchange data suggest large foreign exchange purchases in January, more modest purchases in February, and further substantial purchases in March through June.

“India’s foreign exchange reserves reached an all-time high in June 2015 as the central bank purchased foreign currency to moderate appreciation pressures from foreign investment inflows on the rupee, particularly in the first quarter of the year,” the Treasury said.

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