The pile touched a record $608,00,000 last month, mainly thanks to the Reserve Bank of India for soaking up the dollar flowing as a foreign direct investment as well as the country’s fast-growing stock market.
But there are some shortcomings in the headline number, analysts say, including researchers from the central bank led by the deputy governor Michael Patra. The Patra and his colleagues at RBI wrote in the latest central bank bulletin, “Levels are often misleading.
Here are five charts that show why India is vulnerable to external shocks despite the record reserves:
While the pile-up is enough to cover 15 months of the fifth largest-importin the world after China, Japan, Switzerland, and Russia, it is well behind Switzerland’s reserves -which can pay for 39 months of imports-22 months of Japan and 20 months of Russia, according to RBI researchers.
Since the economy recovers from the second wave of epidemics, the demand for imports is likely to increase in the coming months.
While India’s foreign reserves are growing, the economy still has a net negative international investment position – which means that foreigners have more Indian assets than foreign assets. According to Radhika Rao, an economist at DBS Bank Limited in Singapore, there is a negative number one imbalance that the central bank would like to fix.
Nations that rely on foreign equity and debt capital for their financing to run old current account deficits. While the foreign short-term debt as a part of reserves is falling sharply, Indian policymakers often fret about the country’s risk storing for external shocks.
Foreign flows have helped in building the country’s reserves without any doubt. But the good times may soon be over as the US Federal Reserve is ready to withdraw some of its extraordinary monetary stimuli, possibly triggering outflows from emerging markets.
India’s foreign exchange pile will help fight, RBI says
Reserve growth is a priority for the central bank, Governor Shaktikanta Das had last month cited RBI’s efforts to stabilize the financial market and liquidity situation so that monetary policy remains free to “pursue national objectives”.