India’s record forex pile may not be adequate, RBI paper says

India’s record more than $600 billion of foreign exchange reserves might not be good enough, as it falls short on some measures including import cover and liability outflows, according to a new research from the central bank.

“While foreign exchange reserves provide cushions against unforeseen external shocks, levels are often deceptive,” Reserve Bank of India researchers, led by Deputy Governor Michael Debabrata Patra, wrote in the latest monthly bulletin. “A better gauge of external vulnerability is an assessment of specific indicators.”

Foreign exchange reserves surged to $605 billion in the week to June 4 as the RBI mopped up dollars flowing into the nation’s booming stock market as well as via foreign direct investments. The pile is the world’s fifth-biggest after China, Japan, Switzerland and Russia, and is enough to cover 15 months of imports.


That’s less than the 39 months cover offered by Switzerland’s reserves, 22 by Japan’s, 20 by Russia’s and 16 months by China’s pile, according to the RBI researchers. Besides, India’s net international investment position — which is the assets over liabilities — is a minus 12.9% of gross domestic product. The minus figure denotes that liabilities owed to foreigners are more than assets.

“These factors warrant a pragmatic assessment of reserve adequacy on FX reserves, including exposure to valuation changes and market risk in a world of heightened global uncertainty,” the researchers said.

In its latest annual report, the RBI had said that given the record pile up of reserves it would explore new asset classes and markets for deployment of foreign currency assets as it seeks to diversify its portfolio and seek higher returns. Currently, the RBI invests only in gold and sovereign debt.

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