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India’s forex reserve can cover imports for 8.4 months: Morgan Stanley

India’s forex reserve can cover imports for 8.4 months: Morgan Stanley. Photographer: Victor J. Blue/Bloomberg (Bloomberg)Premium
India’s forex reserve can cover imports for 8.4 months: Morgan Stanley. Photographer: Victor J. Blue/Bloomberg (Bloomberg)

The report stated that both oil and non-oil exports have declined in recent months likely due to weaker global demand and domestic factors such as the imposition of windfall taxes on the export of petrol/jet fuel at the beginning of July.

Aggressive intervention by the RBI to prevent sharp depreciation of the domestic currency against the dollar has led to a sharp reduction in India’s currency war chest. The Indian rupee weakened past the 81-mark for the first time against the US dollar on Friday.

India’s spot FX reserves dipped to $551bn for the week ending September 9, which has reduced import cover – defined as the number of months of imports funded by spot FX reserves – to only 8.4 months, a Morgan Stanley report said.

The report stated that both oil and non-oil exports have declined in recent months likely due to weaker global demand and domestic factors such as the imposition of windfall taxes on the export of petrol/jet fuel at the beginning of July.

“On the other hand, relatively resilient domestic growth has kept imports elevated, leading to record high merchandise trade deficits in recent months. Our current account deficit forecast is 3.2% of GDP in 2022, and we forecast a BoP deficit above $60bn in 2022," it added.

Morgan Stanley expects a 50 basis points hike in repo rates in the September meeting from 35 basis points earlier and a 35bp hike in the December meeting compared to 25 basis points previously.

Global brokerage house also revised India’s Q4 food inflation forecast higher to 6.8% YOY from 5.5% YOY.

“Further, core services inflation is likely to grind higher even as we have some offset from lower than expected core goods inflation so far. We forecast headline inflation in Q4 2022 at 6.8% YOY, above the RBI’s inflation forecast," it added.

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