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Foreign exchange: ‘India’s forex reserves of $600 bn not enough’, says RBI paper

Foreign exchange: ‘India’s forex reserves of $600 bn not enough’, says RBI paper

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Virendra Pandit

 

New Delhi: India has a record of over USD 600 billion worth of foreign exchange reserves but it is not enough: it falls short on some measures including import cover and liability outflows, according to new research from the Reserve Bank of India (RBI).

“While foreign exchange reserves provide cushions against unforeseen external shocks, levels are often deceptive,” the RBI’s researchers, led by Deputy Governor Michael Debabrata Patra, said in the central bank’s latest monthly bulletin.

“A better gauge of external vulnerability is an assessment of specific indicators,” it said.

India’s forex reserves increased to over USD 605 billion in the week ended June 4, 2021, as the central bank collected dollars flowing into the country’s booming bourses and also via foreign direct investments (FDIs).

The RBI’s forex reserves are the world’s fifth-largest after China, Japan, Switzerland, and Russia, and are enough to cover 15 months of imports, media reported on Thursday.

But it is still not enough as it is less than the 39 months’ cover offered by Switzerland’s reserves, 22 months by Japan’s, 20 by Russia’s, and 16 months by China’s pile,  the researchers said.

Also, India’s net international investment position (its assets over liabilities) is a minus 12.9 percent of gross domestic product (GDP). It means that liabilities owed to foreigners are more than assets.

“These factors warrant a pragmatic assessment of reserve adequacy on FX reserves, including exposure to valuation changes and market risk in a world of heightened global uncertainty,” they said.

In its fresh annual report, the RBI said that with record forex reserves, it would explore new asset classes and markets for deployment of foreign currency assets as part of diversifying its portfolio, seeking higher returns.

At present, the central bank invests only in gold and sovereign debt.

 

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