Forex reserves down to 7 months import cover: RBI

Ever since India's import bills have been spiraling, the government has one worry on its mind. Whether it will have enough forex reserves to service several months of import bills. After all, the prices of neither oil nor gold, India's two biggest imports, seem to be holding up. Meanwhile the memories of 1991 balance of payment crisis keep haunting us. Not that we are yet anywhere close to such a dire state as was the case in 1991. However, any more callousness on the part of the government could land us in trouble!
For one, India's foreign currency reserves are already down to seven months of import cover. The same was about eight and half months cover at the end of September 2011. The sharp decline in forex reserves can be attributed to lower foreign fund inflows. This was mainly a result of Eurozone uncertainty and slowing domestic economic growth. Moreover, the Indian rupee has touched record lows since December. This has forced the central bank to sell dollars from its reserves to protect the local currency.
India's currency and balance of payment woes are not a thing of the past. Despite above average growth rates in the past few years, the economy continues to be threatened by grave risks. Comparing the current situation to 1991 and taking solace will not help. Instead the government should rather assess the situation with more realistic estimates.