India's foreign exchange reserve cover for imports has fallen to 9.5 months, meaning the country's foreign exchange reserves are enough to cover only 9.5 months long imports. This was disclosed by Reserve Bank of India (RBI) governor Shaktikanta Das in his speech at the Vibrant Gujarat Global Submit last week. This import cover data is for September last year. This reserve cover was 10.9 months in March 2018 and 11.3 months in March 2017. If this fall continues, it is not a good sign for country's macro-economic stability. Here are four reasons why India's reserve cover is on the decline:
1) Stagnant foreign exchange reserves
The country's foreign exchange reserves are stagnant for a while because of RBI's intervention in the foreign exchange market to reduce the forex volatility. The rupee recently came under tremendous pressure because of a strong dollar, trade war and currency war fears. The steep fall from the 60 level to almost 74 level had created a panic among investors. The RBI had to intervene to stabilise the market.
2) Weakening rupee value
In the last few months, the rupee has gone back to its earlier levels of 71. Given the political uncertainty and the slowdown in global markets, there is likely to be more pressure on rupee if the pace of exports slows down in future. The imports are already up. The current account deficit (CAD) is also on the rise. CAD has risen from 0.6 per cent of GDP in March 2017 to 1.9 per cent in March 2018. The CAD had gone up to 2.7 per cent in September 2018.
3) Slowdown in FII inflows
The kind of foreign inflows India attracted in the last few years will not be repeated in the near future because of many reasons. The stock market has already peaked and the corporate earnings are not matching up to expectations. There are other competing stock markets for foreign investors to make money.
4) US Fed rates
The US Fed rates are also up from near zero in 2008 to 2.25-2.50 per cent now. The rise in short term rates have hardened the interest rates in US. The debt flow to India now looks challenging as Indian interest rates are stable (or falling) whereas the US rates are going up. The narrowing of differential in interest rates with a weakening rupee doesn't offer any comfort to foreign debt investors to come to India.