India’s total foreign reserves higher, but liabilities higher too

By late February, India's total foreign reserves fell to USD 346bn, after a brief jump and down by around USD 8.6bn from its record peak in mid-2015. The authorities' presence to curb rupee volatility and currency valuation are expected to have influenced the rate of reserve accumulation. The decline coincided with INR's sharp decline against the US dollar. After the Indian government cut the scale of domestic borrowings and prioritized fiscal deficit targets, stability returned.

In spite of the decline in reserves, it is comfortable on domestic metrics, particularly with regard to the import cover and sufficiency to cover short-debt external devbt levels. However, it falls short in comparision to the total external debt position and as a percentage of GDP vis-à-vis regional counterparts. Even if foreign exchange reserves have increased, foreigh debt has also increased, leaving the nation's net international investment position (NIIP) in the red.

The imbalance is expected to have deteriorated further by Mar16 as a higher reserves buffer was likely countered by a sharp increase in portfolio flows. Reserves, on the assets side, reached USD 343bn by Mar15. However, this is offset by a surge in liabilities in the form of short-term credits and portfolio inflows. Moreover, offshore loans also increased that cumulatively exceeded the stock of foreign reserves. Hence, even of the focus in on developing buffers against external headwinds, its composition can be at risk if global environment deteriorates.

On the positive side, the attempts to correct this imbalance is in process, as the government intends to increase non-debt creating flows and fund crucial infrastructure projects. Meanwhile, the RBI is expected to remain focused on building the FX buffers, while declining trade deficit reduces the dependence on portfolio flows.