Increasing forex reserve to help improve import cover

  • 06-May-2019
  • Increasing forex reserve to help improve import cover

Continuing strong inflow of funds by Foreign Portfolio Investors and Reserve bank of India’s decision to conduct $10 billion dollar-rupee buy-sell swap auction between March and April 2019 has lifted the foreign exchange reserve to a near one-year high of $418.5 billion for the week ended April 26, 2019.

Rising forex reserve is expected to further increase the import cover for the country as the finance ministry has, in its monthly economic report for March 2019, pointed that it resulted into an increase in the import cover from 9-months in October 2018 to 11-months in February 2019.

According to the RBI data while the forex reserves stood at $399.1 billion for the week ended February 22, it has risen sharply by over $19 billion over the last two months. The reserves of $418.5 billion is the highest since May 4, 2018 when it stood at $418.94. Since February 1, 2019 FPIs have pumped in a net of Rs 76,259 crore into Indian equity and debt markets. While a growing inflow of FPI money has helped the rupee withstand pressures on account of rising crude prices, following US decision to withdraw waivers for imports from Iran, it is also expected to improve the country’s import cover further.

Finance ministry, in its latest Monthly Economic Report for March 2019 said Rising forex reserves led to an improvement in India’s import cover. Forex reserves in terms of months of import cover has fallen from 14 months from April 2016 to 9 months in October 2018. However, the import cover has been increasing since then and was at around 11 months in February, 2019, said the report. It further added that a decline in imports would lead to improvement in current account deficit in fourth quarter of 2018-19 as forex reserves continue to rise.

While forex reserves had hit a high of $426 billion in the week ended April 13, 2018, it witnessed a steady slide over the following months and went down to $392 billion in the week ended October 26 on the account RBI intervention to manage the rupee, which slipped to all time lows in October 2018 following sharp rise in crude oil prices and outflows by foreign institutional investors

In October 2018, the rupee had fallen to its all time low of 74.34 against the dollar in line with the rising crude oil prices and the RBI had to intervene to stem the slide of rupee against the dollar following capital outflows from the debt and equity markets. In October the Brent crude oil prices had hit a high of around $86 per barrel putting pressure on rupee and India’s current account deficit. However, as the crude oil prices fell sharply over the following months to levels of around $52 per barrel by the end of December 2018, it offered a much needed relief to the rupee and the economy. Though fund outflows by foreign portfolio investors in September and October from both equity and debt markets amounted to nearly Rs 60,000 crore, putting additional pressure on rupee against the dollar, FPI fund flows, stabilised over following months and between November and December 2018.

In November and December, they invested a net of over Rs 17,000 crore in the equity and debt markets providing some strength to the rupee. Since Feb 1, FPIs has pumped in a net of additional Rs 76,259 crore into the Indian capital markets.

A significant part of the relief to rupee came on account of decline in crude oil prices from around $86 per barrel in October to $52 per barrel in December 2018. The Brent crude is currently trading at levels of around $71 per barrel and the rupee closed at 69.2 against the dollar on Friday.

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