Letters: Reference point

Apropos the editorial, "Endgame in Athens" (June 30), which stated India's foreign exchange reserves are at a record high. This is true in an absolute sense but is of limited relevance in a risk mitigation sense if there are large foreign exchange outflows.

We do not refer to fiscal or current account deficits or gross domestic product (GDP) in absolute terms. Deficits are expressed as a percentage of GDP and real growth is expressed with reference to last year's GDP. Similarly, India's forex reserves need to be stated in absolute terms plus the number of months of import cover and with respect to short-term debt. For reasons that I do not understand, official agencies and print media often insist on talking about short-term debt as debt which has one year or shorter maturity when it is contracted. For risk management purposes, short-term forex debt should be measured as all debt which has residual maturity of one year or less. For example, debt which originally had 10 years maturity and nine years have elapsed, should be included in the short-term maturity bucket. In fact, although it is difficult to track in real-time, short-term trade and working capital credit in forex, too, should be monitored closely.

Now for a few numbers that are readily available. In 2008, just before the financial sector meltdown, India had forex reserves amounting to 14 months of imports - currently that number is down to 7.8 months. Short-term forex debt (defined as residual maturity of 12 months) was 27 per cent of forex reserves in 2008 and now that is substantially higher at 57 per cent.

Consequently, I find it surprising that some newspapers keep referring to the absolute volume of forex reserves and ignore relevant ratios, such as months of import cover and relative size of forex reserves with respect to short-term forex debt. Wouldn't that be equivalent to announcing periodically that our GDP has reached a new record level or that the absolute amount of the current account deficit has reached a record high or low at so many billions of dollars without any reference to GDP?

Jaimini Bhagwati New Delhi

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