MUMBAI: The Reserve Bank of India can do what perhaps even the People’s Bank of China can’t when it comes to foreign exchange reserves to meet the needs of defending the currency if one goes by a metric of the International Monetary Fund.
Going by the IMF’s ‘reserves adequacy’ measure, a formula that combines reserves, external debt, imports, and flows, India stands better than China and South Africa, its peers in the BRICS combination. While the Indian central bank may have sold more than $20 billion of its reserves, it can still use another 8-10per cent of its reserves to defend the rupee, calculations by economists show.
At $402 billion, India’s ratio to reserves to the adequacy indicators, or what the IMF calls reserves adequacy metric, which combines reserves with its short terms debt ratio, imports and capital flows, works out 150.7 per cent, compared with China’s 85.9 per cent, and South Africa’s 64.2 per cent.
“India is in the comfortable range based on this metric,” said Radhika Rao, chief India economist, at DBS, in a research note. “Given the lingering external risks, another 5-8 per cent fall in reserves is probable, but is unlikely to jeopardise the adequacy math by much.”
The ratio of reserves between 100 and 150 per cent of the reserves adequacy metric is considered adequate for a country to handle the external shocks.
A reserve adequacy metric, according to the IMF, is a measure of a country’s potential foreign exchange needs in adverse conditions against which reserves could be held as a precautionary buffer. Its size relative to reserves could be a measure of a country’s vulnerabilities, and hence provides an indication of adequacy.
India’s foreign exchange reserves are down $23 billion from a peak of $426 billion in April to $403 billion in early-August to defend the rupee which has lost more than 5per cent in value since April to touch a new low of close to ?70 to a dollar. “Unfortunately, any further rise in reserves this year is unlikely as foreign capital flows slow, and current account pressures resurface,” Rao said The external sector indicators are slipping, leading to speculation that India might be in a situation like it was in 2013, forcing some special scheme to raise additional dollar resources.
“It’s important to underscore that India is far more insulated from global shocks in 2018 than it was in 2013,” said Sajjid Chinoy, chief India economist, JP Morgan, in an interview to ET. “Inflation is much lower, CAD is rising but not to the levels witnessed in 2013, and forex reserves are much higher. So, starting points are better and buffers are greater. But we are not immune to global shocks.”