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  1. Forex reserves at all-time high, but far from pre-crisis adequacy levels

Forex reserves at all-time high, but far from pre-crisis adequacy levels

India’s foreign exchange reserves, at an all-time high currently, are still far off from pre-crisis adequacy levels, which, perhaps, is the reason the Reserve Bank of India...

By: | Mumbai | Updated: March 20, 2015 8:56 AM

India’s foreign exchange reserves, at an all-time high currently, are still far off from pre-crisis adequacy levels, which, perhaps, is the reason the Reserve Bank of India’s dollar purchases are not slowing down.

Forex reserves were at $338 billion as of February 27, up $43.7 billion from a year ago on the back of aggressive dollar buying by the central bank. The RBI’s dollar purchase in January was $12.14 billion, the highest monthly buy in seven years. Dealers said the central bank has been buying dollars even in February and March albeit the frequency has slowed.

The adequacy of reserves is gauged mainly through their import cover which is the extent of import payments the reserves can meet at a given point in time. A cover of minimum three months is considered essential for stability. Forex reserves at the current level offer an import cover of 11 months, an improvement from an import cover of around 7 months in the last one year. However, this coverage is yet to reach pre-crisis levels of 14 months in March 2008.

foreign exchange reserves, Reserve Bank of India, Forex reserves, Crude oil

The cover has increased due to a rise in reserves as well as a simultaneous fall in the country’s merchandise imports. Imports have shrunk, simply due to a fall in the global oil prices that have already started climbing up again. Imports fell 15.66% to $28.39 in February and the Indian crude oil basket price averaged around $59 during that month.

Economists say that since adequacy is a judgment call, RBI could be playing it cautious as a possible reversal of dollar flows becomes a plausible threat in the near future. “We believe the reserves should accumulate to $370 billion,” said Shubada Rao, chief economist at YES Bank.

Following a meeting with the finance minister, RBI governor Raghuram Rajan, on Wednesday, said the country’s forex reserves are “significant” and, therefore, the RBI is prepared for any major dollar outflows.

With the US Federal Reserve expected to tighten monetary policy, analysts are forecasting dollar outflows from emerging market economies including India.

On Tuesday, the International Monetary Fund had warned that the emerging market economies should prepare for greater volatility in markets as the Fed readies to tighten its policy. “It is very difficult to say what level of reserves are adequate. But one can never rest easy over reserves.

We also need to see reserves in relation to external debt and capital flows,” said Saugata Bhattacharya, chief economist at Axis Bank.

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