India's fluctuating forex reserves, AI in investment management, and more

Welcome to Finance Wrap India, a simplified fortnightly guide to everything finance, told through the voice of experts on LinkedIn and put together by LinkedIn News India editor Preethi Ramamoorthy. 

In this edition, we try to understand why forex reserves play an important role in India's economic health and explore the possibilities that AI offers in the field of investment management.

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Fluctuating forex, a cautionary tale?

India’s foreign exchange (forex) reserves kitty has been on a rollercoaster ride. After three consecutive years of rise, forex reserves declined by around $70 billion in 2022. In March this year, however, they began to rise again, hitting an eight-month high.

Forex reserves have consistently been considered as one of the indicators of India’s overall economic health. Simply put, a country accumulates forex reserves when its earnings from export of goods and services exceed payments against imports. These can be anything from foreign currencies and gold reserves to treasury bills and bonds that are retained by the Reserve Bank of India (RBI).

What is the primary objective of forex reserves? “They help countries fight or overcome economic instability,” says Sachchidanand Shukla , Chief Economist at Mahindra Group. “They are instruments that help maintain the stability of the domestic currency. More importantly, adequacy of reserves calms investors in times of extreme uncertainty such as wars or unrest and portrays a positive image and reassures trading countries.”

Read Sachchidanand Shukla's full post here.

In 2020, India’s forex reserves crossed the $500-billion mark for the first time in history. This was due to high foreign direct investment, foreign institutional investment, and low oil prices. Experts say this cushioned India against external shocks in the subsequent years. India continues to maintain the fifth highest level of reserves globally (after China, Japan, Switzerland, and the U.S.)

A fall in forex reserves could be just as quick as witnessed last year. “After the Russia-Ukraine war, the sharp increase in oil prices, a flight to safety of the U.S. dollar, and recovery in demand for imports led to a fall in foreign exchange reserves,” says Rachita Daga , Economist at World Bank Group.

Read Rachita Daga's full post here.

In recent times, India’s neighbours — Sri Lanka, Pakistan, and Bangladesh — have faced severe economic crises due to their depleting forex reserves. This has underscored the need for India to safeguard its forex future too.

“Forex reserves are a war chest built in good times, for the bad times,” says DSP MF Economist Ankita Pathak , adding that the good times are coming. “As we stand today, crude prices have moderated, services surplus is higher than oil deficit, services surplus has doubled from pre-Covid levels, India is set to receive good foreign flows.”

Read Ankita Pathak's full post here.

Ka-ching! How may AI help you?

It can write code, draft social media posts, improve your grammar – but can it make financial investments on your behalf?

Artificial Intelligence (AI), in its different forms, is being touted as one of the most transformative technologies to have emerged in recent years. It has made its way into every sector, including finance. Finance companies are increasingly using AI to help with budgeting, cost analysis, and other functions. But some industries within – like stock trading and investment management – are taking a slower approach.

According to a report by Livemint, brokerage and trading firms in India have shown interest in AI and the features it can offer but have not committed to full adoption yet. The primary reason for keeping away from investing in AI to boost customer offerings is that customers themselves are wary of simply trusting AI for making investments.

“Investing is a personal matter and requires personalised approaches and plans which has made this space a difficult one to crack for AI-based approaches and startups,” says Jay Kumar Hotani, Risk Assurance specialist at EY.

Read Jay Kumar Hotani's full post here.

Indeed, financial advisors bring a wealth of knowledge and expertise to the table, including an understanding of financial markets, products, and strategies. “AI projections might be great in a clear trend market but in a sideways market with external forces, AI can’t be the sole factor to be depended on as human expertise on the subject matter will be required,” Hotani adds.

The number of Indians dipping their feet in the equity market is growing. Before March 2020, the number of DEMAT accounts in India stood at around 4.09 crore. Fast forward to September 2022, and the count is at 10 crore.

“Technology has made investing a breeze today,” says Anand K. Rathi, Co-founder of investment platform Mira Money. “AI will provide deeper and better customer insights. It would track consumer behaviour, especially with losses, decision dilemmas, and risks and generate customised investment signals,” he adds.

But Rathi insists that the delivery of the insight will still be human. Building trust and establishing a personal relationship with clients is an important aspect of financial advising. Clients may be hesitant to trust a machine with their financial decisions, especially when it comes to complex or high-stakes issues.

“The soothing impact of ‘Main hoon na, sir’ cannot be replaced by a machine,” he says.

Read Anand K Rathi's full post here.

What role will AI play in investment management? Share your thoughts in the comments below or in a post using #FinanceWrapIndia .

Here’s what finance professionals on LinkedIn are talking about. 

What does the role of a product manager in finance entail? According to Sathvik Gurugubelli , it's all about juggling the "Big 3 - Management, Customer, and Compliance."

Read his full post below.

What's the secret to landing a job in equity research? Aditya Shah says it's all about showing you understand the market well. He suggests the following tips:

• Talk about your learnings in the stock market.
• Talk about a sector or stock that you have deeply researched and understand.

Read his full post below.

What’s your take on the latest news and developments in the world of finance that impact your business? Share a post from your page using #FinanceWrapIndia.