The import cover of Indias foreign exchange reserves was down to 10.3 months as at March-end 2009 as against 14.4 months at March-end 2008, according to the Reserve Bank of Indias latest Report on Management of Foreign Exchange Reserves.
Adequacy of forex reserves is an important parameter in gauging its ability to absorb external shocks.
The import cover has come down in sync with forex reserves declining by $57.738 billion in FY2008-09 to $252 billion as at March-end 2009. In the previous year, the reserves had jumped by $110.544 billion to $286 billion.
Reasons for decline
A major portion of the decline (65.2 per cent) in reserves in FY2009 is attributed to valuation loss i.e. movement of the US dollar against other currencies in which foreign currency assets are held.
Apart from the current account deficit, the outflows under foreign institutional investors, short-term trade credit to India and banking capital were the other major sources contributing to the decline in forex reserves during FY2009.
The ratio of short-term debt to the forex reserves increased to 19.6 per cent as at March-end 2009 from 15.2 per cent the previous year. Short-term debt includes suppliers credit up to 180 days, FII investments in Government of India Treasury Bills and other instruments, external debt liabilities of the banking system, and investments in Government Securities by foreign central banks and international institutions.
The ratio of volatile capital flows (defined to include cumulative portfolio inflows and short-term debt) to the reserves increased to 51.1 per cent as at March-end 2009 from 45.4 per cent earlier.
The RBI holds about 357 tonnes of gold forming about 3.8 per cent of the total forex reserves in value terms as on March-end 2009. Of these, 65 tonnes are being held abroad since 1991 in deposits/ safe custody with the Bank of England and the Board for International Settlements.
The deployment pattern of foreign currency assets, which are invested in multi-currency and multi-asset portfolios, shows that in FY2009 investment in securities was up by $23.505 billion to $134.792 billion while deposits with other central banks, BIS & IMF was down by $58.681 billion to $101.906 billion. Deposits with foreign commercial banks/ funds placed with external asset managers decline by $698 million to $4.728 billion.
According to the RBI, the primary objective of reserve management for most countries is preservation of the long-term value of the reserves in terms of purchasing power and the need to minimise risk and volatility in returns and India was no exception in this regard.
While safety and liquidity constitute the twin objectives of reserve management in India, return optimisation becomes an embedded strategy within this framework, the Report said.