Mumbai: With imports contracting every month and foreign exchange reserves piling up at the same time, import cover of reserves — or the number of months of imports that the reserves can finance — may now be adequate for a year, way above the comfort level of 7-8 months. Imports growth contracted for the sixth straight month to $38.11 billion in November, driven by a slide in petroleum, engineering and industrial items, an indicator of sustained demand slowdown in the economy.
But this could be good news for the country’s external sector strength as the dollar assets that get saved in the process could help the central bank in building an armoury of reserves to defend the rupee against the US dollar if need be. At the current levels of imports, and the country’s foreign currency assets at $419 billion as of November end, the import cover is adequate to finance more than 11 months’ imports. Going by the trend in reserve pile-up and the likely slowdown in imports this month as well, India’s reserves could well be adequate to finance a year’s exports by end December. This would be way above the globally acceptable comfort level of 7-8 months’ financing potential.
Data show that the country’s import cover has been rising continuously since June, also helped by a pile up of foreign currency assets. Foreign currency assets have risen by $21 billion since Septemberend. The latest report on management of foreign exchange reserves, released by the RBI on Friday indicates reserves are adequate by other measures as well.
Import cover is not the only measure that central banks look at to assess the adequacy of reserves. They also look at the composition of debt and amount volatile flows. The ratio of short-term debt (original maturity) to reserves, which was 26.3% at end March, declined to 25.5% at end June. The ratio of volatile capital flows (including cumulative portfolio inflows and outstanding short-term debt) to reserves declined to 86.7% at June-end from 88.7% at March-end, the report said. But this may not induce the RBI to stop buying dollars and build reserves, economists said.
The reserves position may not continue to improve even as it might take longer to for imports to increase.
Source: Economic Times
