New Delhi, India (BBN)- India’s foreign exchange reserves have swelled in recent months to a near record high, but the country is nowhere near the comfort level of February 2008 prior to the global meltdown when it was in a position to finance imports of about 15 months compared with just over eight months at present.
Forex reserves rose to $317.8 billion on July 18 from a low of $275 billion in August 2013 when the rupee had plunged to its weakest of 68 against the US dollar. This happened initially through the Reserve Bank of India’s efforts to incentivise deposit inflows by non-resident Indians, or NRIs, and overseas borrowings by banks, the Times of India reported.
However, RBI may have to beef up the reserves to about $500 billion to regain the purchasing power it had before the global economic crisis. Besides, with the overseas debt at $420 billion, the Indian currency continues to be vulnerable despite rising reserves.
Since January, foreign portfolio equity inflows have surpassed $11 billion, while $12 billion have come into the domestic debt markets. More than 40% of these have come in since the general elections in May that saw the installation of the new government with a decisive mandate, notes a report by DBS.
Forex reserves swell to over $300 billion, but just enough to cover imports of 8 months Yet, India’s import cover, or the number of months of imports that the reserves can finance, is much lower than a little over $300 billion it had in the kitty prior to the meltdown. “The market sentiment is turning with the RBI demonstrating its ability to raise foreign exchange reserves,” said Indranil Sengupta, chief India economist, Bank of America Merrill Lynch. “Still, to remain comfortable to be able to fund about eight months’ imports, the RBI will have to buy around $80 billion until March 2016.”
Analysts say that assuming a monthly import bill of $40 billion, India’s forex reserves should be $600 billion to attain import cover of 15 months.
Even on the parameter of forex reserves as a percentage of external debt, India still has a long way to go. Reserves as percentage of external debt have slipped to about 70% from a record high of 140% in March 2008.
However, there is no unanimity on how much forex reserves will be enough. This is partly because sufficient import cover may not necessarily mean adequate foreign exchange reserves, which should also protect the country’s currency.
There have been instances where the currencies of some countries have fallen prey to speculative attacks despite a strong import cover.
“More than adequacy of reserves, it is the stability of capital flows that is important,” said SK Ghosh, chief economic advisor, State Bank of India.
“Take the case of Brazil, which has close to 16 to 17 months’ import cover and has more than twice India’s foreign direct investment. Yet, its currency is vulnerable to speculation as capital flows into the country comprise more of short-term debt flows and are volatile unlike in the case of India.”
BBN/SSR/AD-28July14-3:29 pm (BST)
