'Levels often deceptive': 5 reasons why India needs to up record forex pile

 The reserve touched a record $608 billion last month due to RBI soaking up dollars.

The rise in India’s foreign exchange reserves to above $600 billion may not be enough to beat the challenges looming for Asia’s third-largest economy, according to some central bankers and economists.

The pile touched a record $608 billion last month, thanks mainly to the Reserve Bank of India soaking up dollars flowing in as foreign direct investments, as well as into the nation’s booming stock market. The hoard may help reassure investors and credit-rating companies about the government’s ability to meet its debt obligations despite a deteriorating fiscal outlook.

But the headline number hides some deficiencies, say, analysts, including researchers at the central bank led by Deputy Governor Michael Patra. “Levels are often deceptive,” Patra and his colleagues at the RBI wrote in the latest central bank bulletin.

Here are five charts that show why India is vulnerable to external shocks despite the record reserves:

While the pile -- the fifth-largest in the world after China, Japan, Switzerland, and Russia -- is enough to cover 15 months of imports, it’s well behind Switzerland’s reserves -- which can pay for 39 months of imports -- Japan’s 22 months and Russia’s 20 months, according to RBI researchers.

As the economy recovers from the pandemic’s second wave, demand for imports is likely to increase in coming months.