International Investment Position

International Investment Position

Subject: Economy

Section: External sector

Context:

India’s foreign exchange reserves have declined from a peak of $642 billion as of October 29, 2021, to $590.50 billion in June 2022, a fall of $51.50 billion. However, the comfort is that the  current level of forex reserves are large enough to cover almost 12 months of imports.

Whether the metric of import cover reflects adequacy of reserves?

• Partially, as India’s forex has to finance the currency account deficit i.e. the import bills, and the constant stream of capital outflows.
• The accretion of forex reserves has been due to surplus in capital account. Hence, India has had a structural current account deficit which has been funded by capital inflows.

Alternatives?

International Investment Position or IIP

• It is the summary statement of the net financial position of a country viz. net of, the value of financial assets of residents of an economy that are claims on non-residents and, gold held in reserve assets and liabilities of the residents of an economy to non-residents.
• International Investment Position= Asset- Liabilities
• Assets comprise direct and portfolio financial investments of residents outside India plus reserve assets.
• Liabilities are direct and portfolio investments made by non-residents into India
• Positive IIP indicates that the country’s assets are more than liability while negative IIP means that the country’s liabilities are more than assets.
• India is a net IIP negative country with its liabilities exceeding assets.
• In absolute terms, India’s outstanding portfolio investments is $277 billion and short-term debt of $110 billion leaves an import cover around 3.25 months.
• Thus, Import cover must be looked at in conjunction with IIP which gives a true picture of the adequacy of reserves