Forex cover for imports may fall to lowest this year under Modi govt

There could be $27.7 billion dollars of withdrawals in the next five months

If the finance ministry's assessment that there will be a drawdown of $45-50 billion from foreign exchange reserves in this financial year comes true, reserves at the end of the year would provide cover for around eight months. This import cover of foreign exchange reserves may be the lowest under the Narendra Modi government or the lowest in nine years.

Economic Times reported on Wednesday that the country's balance of payments is likely to slip into a $45-50 billion deficit in the current financial year.

India saw accretion of $4.6 billion to the forex reserves on the balance of payments (BoP) basis in the first quarter of the current financial year. This happened as the current account deficit came to $23.9 billion or 2.8 per cent of the gross domestic product against expectations by analysts that it would cross three per cent.

This means that there has to be a drawdown of $54.6 billion in the remaining nine months of 2022-23, if the withdrawal is up to $50 billion dollars in the full year.

By October 28, foreign exchange reserves stood at $531.1. If drawdown is taken on a pro-rata basis there could be further $27.7 billion dollars of withdrawals in the next five months. This would take foreign exchange reserves to $503.4 billion.

It should be noted that there would be pressure on the rupee value to depreciate if foreign reserves are withdrawn. The Reserve Bank of India may further pump in dollars to stabilise the rupee, resulting in further reduction of forex reserves.

Assuming that there is no pumping of dollars in the market to stabilise the rupee, $503.4 billion reserves would be sufficient for merchandise imports of 7.96 months. This was arrived from $63.2 billion dollars of imports that the country has been making a month on an average till September of the current financial year. However, if international commodity prices go down further, import cover of forex reserves may be more.

Already, imports have been coming down since August. It had stood at $61.9 billion in August and $61.2 in September against $66.3 billion in June and July.

Before this, the country saw import cover of forex reserves of less than eight years in 2013-14, the last year of the United Progressive Alliance (UPA) government. That time the forex reserves were sufficient to provide cover to 7.83 months.