With only enough cash in the Reserve Bank of India (RBI) to pay for seven months of imports, $172 billion of debt falling due in the next eight months and weak fund inflows, the balance of payments position is undermining its ability to defend a tumbling rupee.
A heavy dependence on imported energy, gold and technology means India has historically run a current account deficit, which it has funded by attracting foreign money into stocks, bonds and corporate investment.
But as global investors turn away from emerging markets in anticipation of the U.S. Federal Reserve starting to wind back its stimulus, India’s weak external position makes it more vulnerable to outflows and a balance of payments deficit.
India has $280 billion of foreign exchange reserves. That is only enough to cover seven months of import bills, by far the lowest of the BRICs, the four major emerging market economies.
That has left the RBI with limited firepower to support a rupee which has fallen 12 percent since the start of May and hit a record low of 61.80 to the dollar last week.
India “can’t afford to defend the currency much with such little reserves,” a policymaker said, declining to be identified as he was not authorised to speak with media.
The RBI is said to consider three months of import cover to be the minimum acceptable level, but some central bank insiders are said to be uncomfortable that reserves have run down to the lowest in terms of import cover since 1996.
“The lower import cover continues to be a source of discomfort,” said another policymaker.
“We would like to increase the import cover. If there is a gap in the BOP, then the currency will have to take a hit.”
That said, India is not yet looking at a repeat of its 1991 crisis. Then, with only enough reserves to cover three weeks of imports, the government was forced to pledge its gold in order to pay its bills and had to push through reforms to start opening up the economy.