Foreign reserves at higher level, but debt increases too: DBS

India's total foreign reserves slipped to $346 bn by late-Feb, down about $8.6 bn from its record peak in mid-2015

India's foreign exchange reserves may have been at an elevated level, but its other liabilities have gone up, following which the country's net international investment position (NIIP) has ended up in red, The Development Bank of Singapore Limited (DBS) said.

According to DBS' report, after a brief jump, India's total foreign reserves slipped to $346 billion by late-February, down about $8.6 billion from its record peak in mid-2015.

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DBS said that despite the fall in the reserves stock, it is comfortable on domestic metrics, especially with regard to the import cover and adequacy to cover short-debt external debt levels.

"While foreign exchange reserves have risen, foreign debt (and other liabilities) is also up. This has left India's NIIP in the red," DBS said in a research note.

NIIP widened from $63 billion in March 2007 to $368 billion in March 2015.

The report further noted that the imbalance is likely to have worsened by March this year as a higher reserves buffer was likely offset by a surge in portfolio outflows.

On the assets side, reserves amounted to $343 billion by March 2015. But this was counterbalanced by a sharp rise in liabilities in the form of portfolio inflows and short-term credits.

"Even as the focus has been on building buffers against external headwinds, its composition could be at risk if the global environment worsens," DBS said.

The report said the government is taking efforts to correct this imbalance as it aims to boost non-debt creating flows, primarily direct investments, to lend a hand to domestic investment cycle and fund crucial infrastructure projects.

"The central bank at its end is likely to stay focused on building the forex buffers while a narrowing trade deficit lowers the reliance on portfolio flows," it said.