Reserves fell $89 billion in ten months to $553 billion as of September 2022, but are adequate to cover 8.9 month of imports compared to 4.1 months in May 2013 and ratio of short-term debt to reserves at 44 per cent compared to 60 per cent in June 2013 an analysis of official data shows.
” Our reserve adequacy checks still point to sufficient cushion” said Radhika Rao, Senior Economist, Executive Director, DBS Bank, Singapore, acknowledging better import cover position. ” (Besides),total external debt exceeds reserves. But a more important measure of vulnerability is short-term obligation, both original and residual, which currently stands at manageable levels”
India’s external sector comforts that strengthened in the aftermath of the pandemic in June 2020. It added $100 billion to the forex kitty in exactly one year between June 05, 2020 and June 04, 2021 -among the fastest pace in its history. But this comfort started to lose steam since October 2022 which is reflected in the sharp dip in forex reserves as global liquidity conditions started tightening and rupee started weakening forcing the Reserve Bank of India to aggressively intervene in the forex markets to sell dollars. “The sharp reduction in FX reserves reflects a combination of wider current account deficit, FPI outflows, revaluation losses and RBI forex intervention” said Gaura Sen Gupta, economist at IDFC First Bank.
Foreign exchange reserves could fall to $510 billion even in a worst case scenario if the current account deficit widens to 4 percent during FY’23 estimates IDFC First Bank. Still we would be better off than the Taper Tantrum period of May 2013 when reserves were less than $300 billion.
Nevertheless skeptics are ringing an alarm bell on fast depletion of foreign exchange reserves and the slowdown in capital flows on the back of prospects of widening current account deficit and rising global interest rates that could add to debt servicing costs. But there is hope here too. ” The gross external financing ratio, which we use as a gauge for vulnerability, is also at a stronger position than during the taper tantrum” Rao added.
Going ahead there are challenges for the central bank even though global commodity prices are softening that could rein in import bills. Capital flows in the form of portfolio flows and external commercial borrowings would depend on the interest advantage to investors. Foreign direct investment could slow down the prospects of a global slowdown and recession. The central bank will have a challenge in balancing the rupee and the reserves level. ” Drawdown of the forwards book, apart from the reserves stock, is likely to see the central bank stay opportunistic in its intervention presence in the currency” Rao said.