Large Forex Kitty may Not be Good Enough Cushion
NO BUFFER The reserves are the highest ever, but in terms of number of months’ imports that it can fund, it is still much lower than the level in 2008 Record High
Gayathri.Nayak Mumbai: India’s foreign exchange reserves may be at the highest level ever. But that may not be sufficient buffer at a time when the Federal Reserve is considering unwinding of its quantitative easing strategy which will have a ripple-down effect on the financial markets. Trouble may be compounded if local economic activity revives or if global commodity prices rise.
Foreign exchange reserves are at $392.9 billion, the highest ever that India’s central bank has ever amassed. But in terms of number of months’ imports that India’s forex reserves can fund, it is still much lower than the level in 2008 before the global financial crisis touched its peak.
Import cover of reserves, an important measure of foreign exchange reserves adequacy, is currently adequate to fund a little over 10 months’ imports compared to over 14 months’ imports that the reserves could finance in early 2008 until September that year, when the crisis deepened virtually leading to the collapse of the global financial markets.
“Admittedly, import cover of reserves, currently adequate to fund Current forex reserves CURRENT RESERVE