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Friday, July 30, 2021

RBI: Amid rising imports, $600 billion forex reserves may not be enough

Foreign exchange reserves reached an all-time high of $605.0 billion on June 4, 2021.

By: ENS Economic Bureau | Mumbai |
Updated: June 18, 2021 3:41:56 am
“While foreign exchange reserves provide cushions against unforeseen external shocks, levels are often deceptive, and a better gauge of external vulnerability is an assessment of specific indicators,” the RBI said in its ‘State of the Economy’ report.

The Reserve Bank of India (RBI) has indicated that the record level of $600 billion foreign exchange reserves of the country may not be adequate, considering the projected imports and the negative international investment position.

“While foreign exchange reserves provide cushions against unforeseen external shocks, levels are often deceptive, and a better gauge of external vulnerability is an assessment of specific indicators,” the RBI said in its ‘State of the Economy’ report.

In terms of projected imports for 2021-22, the current level of reserves provides cover for less than 15 months, which is lower than for other major reserve holders — Switzerland (39 months), Japan (22 months), Russia (20 months) and China (16 months), the RBI said. At the end of December 2020, India’s foreign exchange reserves cover of imports increased to 18.6 months from 17.1 months at end-September 2020.

Moreover, India’s reserves co-exist with a net international investment position of (-) 12.9 per cent of GDP. “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 RBI said.

Foreign exchange reserves reached an all-time high of $605.0 billion on June 4, 2021. “With this development, India is the 5th largest reserve holding country in the world, the 12th largest foreign holder of US treasury securities and the 10th largest in terms of gold reserves,” the RBI said.

During the six-month period ended March 2021, deposits with other central banks rose from $124.15 billion to $153.39 billion and deposits with overseas commercial banks went up from $7.43 billion to $23.42 billion which works out to 4.36 per cent of total foreign currency assets (FCA).

However, the RBI reduced its investments by $10 billion in overseas securities.

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