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Business News/ Market / Mark-to-market/  Forex reserves less than eight months’ imports, lower than 14 years ago
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Forex reserves less than eight months’ imports, lower than 14 years ago

Assuming forex reserves stay at the current level and imports rise by 10%, the reserves would come down to 7.5 months at the end of March 2015

Now that RBI governor Raghuram Rajan has warned of the risks of a market crash in the offing, do we have enough reserves to see us through such an eventuality? Graphics: Subrata Jana/MintPremium
Now that RBI governor Raghuram Rajan has warned of the risks of a market crash in the offing, do we have enough reserves to see us through such an eventuality? Graphics: Subrata Jana/Mint

Now that Reserve Bank of India (RBI) governor Raghuram Rajan has warned of the risks of a market crash in the offing, the question is: do we have enough reserves to see us through such an eventuality?

India’s foreign exchange reserves may be almost at an all-time high, but they are nowhere near their peak if measured in months of imports. The accompanying chart says it all. Analysts say the current reserves are worth around eight months of imports, but as the chart shows, that’s much less than where they were at the end of 2008-09, just after the Lehman crisis. And they are well below their peak of around 17 months of imports seen at the end of 2003-04.

That’s not all. Assuming forex reserves stay at the current level and imports rise by 10% this fiscal compared with the 2013-14 level, then the reserves would come down to 7.5 months at the end of March 2015. True, that’s more than what we had in FY12 or FY13, but it’s lower than where we were 14 years ago, at the beginning of the century. The buffers built up during the boom years have been frittered away. The chart given here does not take into account any effect of unwinding of RBI’s net forward positions. Note also that around $30 billion of the reserves are the amounts raised through FCNR(B) deposits last year through RBI’s special swap deal.

Unlike most Asian countries, India’s reserves have not been built by the excess of exports over imports, but by foreign fund inflows, particularly by portfolio inflows. Once the quantitative easing programme ends in the US and attention shifts to a rise in interest rates there, the markets are likely to see increased volatility. Not only are we unlikely to see a continuation of the massive fund net inflows we have seen so far this year, but we may also see a period of net outflows, although whether it’s prolonged or not depends on the policies pursued by the US Federal Reserve. Note also that import growth is anaemic at the moment and, if the Indian economy continues to improve, imports too are likely to increase.

The good news is RBI has been continuously adding to reserves and preventing the rupee from appreciating, which is good for exports. In view of the enormous uncertainties ahead as the world markets react to a withdrawal from hugely accommodative policies, RBI must have a strategy ready to address the risks.

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Published: 07 Aug 2014, 08:13 PM IST
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