Forex reserves' import cover dips

India’s foreign currency reserves fell to about seven months of import cover at the end of March 2012 from eight and a half months at the end of September 2011, according to a Reserve Bank of India report.

Forex reserves were $294.4 billion as on March 30, 2012, from $311.5 billion at the end of September. Reserves were at a record high of $320.4 billion on October 28. The latest data, as of August 3, show reserves at $289.2 billion.

“The main reasons for (the) decline in foreign exchange reserves were intervention in the domestic foreign exchange market and the effect of revaluation,” RBI said.

India’s ratio of short-term debt to forex reserves rose to 26.6 per cent at the end of March from 23 per cent last September, the central bank added in its half-yearly foreign exchange reserves management report.

C Rangarajan, who heads the Prime Minister’s Economic Advisory Council, has suggested attention be paid to external payment obligations, beside the traditional import cover of three to four months.

“The ratio of volatile capital flows to the reserves increased from 68.3 per cent as at end-September 2011 to 79.9 per cent as at end-March 2012,” the RBI said.

Referring to management of gold reserves, RBI said it held 557.75 tonnes of gold — about 9.2 per cent of foreign exchange reserves in value terms — at the end of March. Of these, 265.49 tonnes are held abroad in deposits and safe custody, with the Bank of England and the Bank for International Settlements (BIS). The foreign currency assets are invested in multi-currency, multi-asset portfolios. Of the total foreign currency assets of $260.1 bn, about $140.3 bn was invested in securities, $114.3 bn was deposited with other central banks, BIS and the International Monetary Fund.

The remaining $5.5 bn comprise deposits with foreign commercial banks and funds placed with external asset managers. The rate of earnings on foreign currency assets and gold decreased from 2.09 per cent in July 2009-June 2010 to 1.74 per cent in July 2010-June 2011, reflecting the generally low global interest rate environment.