India’s total foreign reserves, which touched a record high of $402.5 billion in September, are high enough to cushion India against external vulnerabilities despite expected reverse in accumulation due to slower portfolio inflows and a wider current account deficit, Development Bank of Singapore (DBS) has said.
“The current stock is sufficient to cushion India against unexpected global risks,” DBS said in a note. India’s foreign reserves rose sharply driven by portfolio inflows, investment flows and a narrower current account deficit.
However, DBS has estimated that due to interventions from the Reserve Bank of India to contain Rupee appreciation, India is likely to witness a reverse in the coming months and slow the accumulation of foreign reserves.
“Beyond the strong year-to-date jump, we expect the pace of reserves accumulation to moderate due to slower incremental portfolio flows and wider current account deficit,” the development bank said.
The bank said that in September, India’s forex grew the most since the taper tantrum in 2013. Taper tantrum is the term used to refer to the 2013 surge in the US Treasury yields, which resulted from the Federal Reserve’s use of tapering to gradually reduce the amount of money it was feeding into the economy. “The import cover (on total reserves minus gold) is comfortable at 10-11 times, better than the 7-8 times seen during the 2013 taper tantrum,” it said.
There are risks of wider current account deficit, the bank said, that unlike last year India will not have a narrower current account deficit (CAD) to offset US dollar inflows this year and even though exports are likely to rebound after post-GST hiccups, DBS has estimated that imports will rise at a faster pace on both price and volume basis.
Last month, Deutsche Bank had advocated using a part of country’s foreign exchange reserves for funding growth-critical public infrastructure projects to support the GST numbers. It had estimated that channelling just 3% of India’s forex reserves could add about 0.6% to GDP.