The ratio of volatile capital flows, which includes cumulative portfolio inflows and short-term debt, to the country's foreign exchange reserves has increased to 68.1 per cent as at September-end 2010, compared with 58.1 per cent as at March-end 2010, according to the Reserve Bank of India.

The increase in ratio of volatile capital flows to the forex reserves is on account of the spike in portfolio investments at $23.8 billion in the April-September 2010 period ($17.9 billion in the corresponding period last year).

The RBI Governor, Dr D. Subbarao, in his convocation address at the Sambalpur University last month, had underscored the fact that India has a preference for non-debt flows such as foreign equity over debt flows. Further, it has a preference for long-term flows such as foreign direct investment over short-term flows such as foreign institutional investment.

The Governor then highlighted the RBI's concern on volatile capital flows. He said “Emerging market economies surely need capital flows for their investment needs. But if they get more of the flows than they can absorb, it hurts the economy both in financial and economic terms….. There are no easy ways to deal with excess flows…What exacerbates the problem is that these flows are prone to ‘sudden stops and reversals' which is to say that they can reverse direction and go out of an economy suddenly, as happened during the crisis, and that can dent financial stability.”

The ratio of volatile capital flows to the reserves declined from 146.6 per cent as at March-end 1991 to 47.9 per cent as at March-end 2009, as per the half yearly report on management of forex reserves.

As per the traditional trade-based indicator of reserve adequacy (that is, import cover of reserves), the import cover stood at 10.3 months at the end of September 2010. As of September-end 2010, India's forex reserves stood at $292.87 billion ($279.05 billion as of March-end 2010).

IIP

India's net international investment position (IIP) has deteriorated with external liabilities exceeding external assets. As of September-end 2010, the net IIP was negative at $211.1 billion ($103.4 billion as of September-end 2009).

Rate of Earnings

The rate of earnings on foreign currency assets (comprising securities; deposits with other central banks, Bank for International Settlements, and International Monetary Fund; deposits with foreign commercial banks/funds placed with external asset managers) and gold, after accounting for depreciation, has decreased from 4.16 per cent in July 2008 to June 2009 to 2.09 in July 2009 to June 2010 reflecting the generally low global interest rate environment.

Gold Reserves

The Reserve Bank held 557.75 tonnes of gold forming about 7 per cent of the total foreign exchange reserves in value terms as on September 30, 2010. Of these, 265.49 tonnes are held abroad (65.49 tonnes since 1991 and further 200 tonnes since November 2009) in deposits/safe custody with the Bank of England and the Bank for International Settlements.

Related Topics