India’s foreign exchange reserves at the current level can sustain only nine-and-a-half months of imports in the event of any external shock, the data from the Reserve Bank of India has shown.
This is for the first time after 2013 that the import cover has come down to a single digit. In 2013, the import cover had come down to 7 months after the taper tantrum and quantitative easing talks by US Federal Reserve Chief Ben Bernanke gave a sudden surge to the US treasury yields and weakened Indian rupee severely.
India’s forex reserves are currently at $397 billion, falling from a peak of $426 billion in April 2018. The import cover of forex reserves, which was as high as 11.3 months in March 2017, has come down to 9.5 months in September 2018, the data, which is released by the RBI twice in a year, showed.
Citing the data, RBI Governor Shaktikanta Das said close monitoring of external sector was needed, given the volatility in global financial markets. He said the import cover was better than only in 2013, raising alarm bells for the government at the Centre close to the General elections.
“Global environment is clouded by high uncertainty increasing downward risks to global growth, trade and investment,” Das said in a speech last week warning of spillover effects on emerging markets due to increase in global interest rates.
Import cover of reserves is a trade-based indicator of reserve adequacy, which is an important parameter in gauging a country’s ability to absorb external shocks. The central bank data also showed a rise in India’s short-term debt to foreign exchange reserves ratio in the past nearly two years.
The debt-to-reserves ratio, which was 23.8% in March 2017, went up to 26.1% in September 2018 for which the latest data was released. Short-term debts come with a maturity of less than one year. Such liabilities are typically on the rise when the demand of foreign currency to fund imports is high.