Foreign Assets as the New Frontier for Indian Investors

Over the last few years, there seems to have been a big push for countries to shift their focus from boosting foreign exchange reserves from forex in their markets and instead turn to accumulating assets abroad, most of which seem to follow behind China. Because of this, GDP shares have fallen quite sharply from 15.4 percent of GDP to around 14 percent, and this is just in the span of the last six years or so.

But while the forex market has been losing some countries' attention, this is not quite so applicable globally. Places such as India and Switzerland have been focusing on growing their reserves instead of gaining assets elsewhere so that their currency does not suffer a loss through foreign exchange rates in the FX market.

Reserves vs. Assets 

As mentioned earlier, although many countries have been turning their attention to growing their assets, many still choose to focus on their reserves instead.

You may be wondering what exactly reserves are, more specifically, forex reserves. Simply put, they are foreign assets held in liquid form by the central bank of a country that works as a sort of insurance in case of any kind of financial scare. As of April 2022, India’s forex reserves stood at $604 billion.

In the case of India, amongst other countries, to prevent a loss to their currency, the rupee, in the forex market, they made sure to buy dollar assets, without which the value of forex reserves would have fallen as well.

Other instances where we have seen a decline in reserves are within countries such as Saudi Arabia, which like China, has opted to invest in foreign assets instead of generating their forex reserves.

Why The Rise in India?

It seems as though, aside from India and Switzerland, there has mostly been a decline among countries that were major holders of reserves, and China and Saudi Arabia are no exception to that. When we look at the total ratio of these reserves falling, it works out to be something like a 7 percent decrease, from 27 percent to 20 percent. The reason behind this is to improve the risk with reduction as well as returns.

According to Credit Suisse, although reserves aren’t a major focus for many countries, it is not that they have taken a complete backseat. Instead, the trend is shifting from wanting to focus on one particular type of foreign asset to delegating their foreign holdings amongst different streams so that they are as optimized as possible.

According to central bank figures, one of the most surprising drops this year has been the fall of Turkish reserves, whose stockpile has shrunk by $4.8 billion in a single week.

So for countries such as China and Saudi Arabia especially, their assets continue to grow, just not in the form of forex reserves as they are in India and Switzerland. As of 2010, the rate of foreign assets for China has dropped over 30 percent from 70 percent to below 40 percent. For Saudi Arabia, we can see a similar trend, with their foreign assets dropping from 60 percent to less than 40 percent, another minimum of a 20 percent (if not more) drop.

Currency Appreciation

It is not so much that India wishes to convert the savings of their country into assets. The reason for an increase of forex reserves in their case is so that they are able to protect their currency and stop what is known as currency appreciation from happening so that they do not suffer a loss in the forex market.

Currency appreciation is when a currency in one country increases in value against another country's currency. So we can see why not only India, but any country, in general, would not want their currency decreasing in value against any other major currency in the world, such as the dollar. For instance, the Singapore dollar has just hit an all-time high against the Malaysian ringgit this year, which has been rising steadily since the end of April.

As is the case with Saudi Arabia and China, their chosen route with assets means that they are running their currency accounts in a surplus which will mean that they will accumulate foreign holdings over time, and this will increase steadily. In contrast to this, forex reserves, as mentioned before, are something that is held in a liquid form, which is kept within a country, with their central bank.

What China and Saudi Arabia have essentially done is gone beyond what is simply needed for insurance purposes and have diversified how their foreign assets function, hoping that it will promise better returns and is both geopolitically and financially more viable.

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