Sluggish Foreign Exchange Growth Rings Alarm Bells As Currency Markets Face Turbulence.

MUMBAI: The BRICS nations' bailout package for Greece came apart even before the first brick was placed. China declined to help despite its $3.2 trillion of reserves, saying it is not a 'saviour'. But India's decision to keep away was probably triggered by the fact that its foreign exchange reserves are insufficient at a time when currency markets are facing turbulence.
Three years of economic growth have helped the gross domestic product (GDP) rise to Rs 73lakh crore in FY11 from Rs 46 lakh crore in FY08. But foreign exchange reserves have remained static in the same period at around $315 billion, a tenth of China's reserves.

The current account deficit, the excess of goods imports over exports, is widening. And it is weakening the Indian rupee that is already fallen down 12% in the last few weeks. India's foreign exchange position is weaker than it was in FY08 when global markets plunged into a crisis. Import cover, a standard measure to gauge the status of reserves, has fallen to just eight months, from 14 months in February 2008 around the time when the subprime crisis in the US became apparent, calculations by ETshow.

In the last one year, about $8.3 billion, or about 2.6%, has been added to reserves on account of valuation of gold in reserves. "There is nearly no possibility of reserves getting accumulated in the coming months, and would possibly lead to further worsening of the import cover ratio," says Siddhartha Sanyal, India economist at Barclays Capital. "I do not think this is at any alarming level at the moment, but further worsening of the same from current levels would demand greater policy attention."

India's central bank is probably facing its worst nightmare in years when it comes to foreign exchange management. It cannot possibly intervene significantly as the reserves have other demands such as overseas loan repayments that are going to mature in the next year or so. Also, the turbulence in international markets may lead to lower inflows as investors seek safety in US treasuries. "What everyone has to realise is that we, as a cluster of nations, face an enormous demand for resources at home, particularly in the realm of (poverty reduction)," Reserve Bank of India governor Duvvuri Subbarao told reporters in Washington last week.

"This causes an incredible amount of tension between allocating money to multilateral institutions for the sake of global stability and meeting stability at home." Foreign exchange reserves which touched $314.6 billion in May '08 remained below the $300 billionmark till mid- February '11.

The reserves are at $316.76 billion as of September 16. This means a net addition a little over $ 2 billion to the reserves since May '08, even as the monthly import bill went up by close to 40% in the same period. India's debt has also been rising due to liberal overseas borrowing policies that helped Indian corporates benefit from interest rate arbitrage.

Overseas debt has gone up to $306 billion at March 2011, from $221 billion in March'08 while the the reserves cushion thinned. Of the total external debt, 42.3% will mature within a year pressuring the rupee. About 40% of the debt is maturing later than three years, the data shows. Besides, the volatile global currency markets over the past three years have resulted in revaluation of reserves, which are held in euro, British pound and the Japanese yen, among others.

The central bank does not provide break-up of assets. India's relative weakness has dented the value of rupee more than other emerging economies. The rupee fell 0.3% to 49.5725 per dollar. It dropped 4.4% last week, the worst performance since March 1993, and touched 49.885 on Sept 23, the weakest level since May 2009, Bloomberg data shows. "Right now, the rupee weakness largely reflects global risk aversion,'' says Jahangir Aziz, Asia economist at JPMorgan.

"India has been affected disproportionately relative to other Asian currencies because it runs a current account deficit.'' India's trade deficit widened to $14 billion in August from $11 billion in July and an average of $9 billion year-to-date. "This widening is worrying, as the capital account has also struggled this year. The global growth outlook has deteriorated, weighing on portfolio flows,'' said Standard Chartered economists in a note.

Source : economictimes.indiatimes.com