India's reserve cover for imports declines on rising imports, stagnant forex reserves

If this fall continues, it is not a good sign for country's macro-economic stability.

By Anand Adhikari  
Tuesday, January 22, 2019

India's foreign exchange reserve cover  for imports has fallen to 9.5 months, meaning  the country's  foreign exchange reserves  are enough to cover only 9.5 months long imports. This was disclosed by Reserve Bank of India (RBI) governor Shaktikanta Das  in his speech at the Vibrant Gujarat Global Submit last week. This  import cover data is for September last year. This reserve cover was 10.9 months in March 2018 and 11.3 months in March 2017. If this fall continues, it is not a good sign for country's macro-economic stability. Here are four reasons why India's reserve cover is on the decline:

1) Stagnant foreign exchange reserves

The country's foreign exchange reserves are stagnant for a while because of RBI's intervention in the foreign exchange market to reduce the forex volatility. The rupee recently came under tremendous pressure  because of a strong  dollar, trade war and currency war fears. The steep fall from the 60 level to almost 74 level  had created a panic among investors.  The RBI had to intervene to stabilise the market.

Also read: Fixing economy is govt's job, not that of RBI governor's

2) Weakening rupee value

In the last few months, the rupee has gone back to its earlier levels of 71.  Given the political uncertainty and the slowdown in global markets, there is likely to be more pressure on rupee if the pace of exports  slows down in future.  The imports are already up.  The current account deficit (CAD) is also on the rise. CAD has risen from 0.6 per cent of GDP in March 2017 to 1.9 per cent in March 2018. The CAD had gone up to 2.7 per cent in September 2018.

3) Slowdown in FII inflows

The kind of foreign inflows  India attracted  in the last few years will not be repeated  in the near future because of  many reasons.  The stock market has already peaked  and the corporate earnings are not matching up to expectations.  There are other competing stock markets for foreign investors  to make money.

4)  US Fed rates

The US Fed rates  are also up  from near zero in 2008 to 2.25-2.50 per cent now. The rise in short term rates  have hardened the interest rates in US.  The debt flow to India now looks challenging as  Indian interest rates are stable (or falling) whereas the US rates  are going up. The narrowing of differential in interest rates with a weakening rupee doesn't offer any comfort to foreign debt investors to come to India.

Also read: FinMin, RBI fight over Rs 3.6 lakh crore 'surplus' from the regulator's reserves

Forex reserves plunge below $400 billion-mark for first time in a year

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