India’s record foreign exchange reserves somewhat mask the country’s vulnerability on its external finances. That’s the takeaway from a note by UBS Group AG’s India economist Tanvee Gupta Jain. Foreign exchange reserves at $421 billion cover 81 percent of external debt as of September 2017 and less than 11 months of imports. That’s down from 138 percent of debt before the global financial crisis and 14.4 months of imports in the 2008 fiscal year, respectively, according to the UBS note. “India remains vulnerable in its external position and risks are rising on the margin,” Jain wrote in the note. “There is no room for complacency and we think policy makers should keep a close watch on monitoring this risk.” The rupee is already among the worst performing currencies in Asia this year as foreigners pull money out of bonds and inflows into stocks slow. The Federal Reserve’s decision to raise interest rates on Wednesday and forecast a steeper path of hikes in 2019 is putting pressure on emerging-market currencies, like the rupee.
The trade deficit has also ballooned from a year ago and caused the current account deficit to nearly double, while firmer prices for oil — India’s biggest import item — are only set to cloud the outlook. While gross external debt rose by $86 billion between March 2013 and September 2017, foreign exchange reserves rose $108 billion during the same period. That’s a sign the Reserve Bank of India has been intervening in the currency market to put buffers in place in case the global financial market volatility hits home.
Jain said that when the Federal Reserve indicated tapering in mid-2013, India had the highest outflow from the debt market, to the tune of $8.6 billion, even though equity flow remained positive. “This time, we believe India is in a relatively better position compared with other emerging markets, since fundamentals are stronger now,” she said.