The depleting import cover 

The depleting import cover 

Subject: Economy

Context:

• The total foreign exchange reserves have steadily fallen from a peak of $642 billion in early September 2021 to $546 billion by the middle of September 2022, the lowest level in around two years.
• In fact, the fall in the reserves have averaged $5 billion in the three recent weeks. This has pulled down the import cover of the foreign exchange reserves from a high of 17.4 months in end March 2021 to 13.1 months in end December 2021. And the recent estimates of the RBI show that the import cover of the foreign exchange reserves has come down to nine months by September 2022.
• This sharp depletion in the import cover of the foreign exchange reserves is a major cause of concern as it can aggravate the vulnerabilities in the external sector. This is all the more so since the United States Federal Reserve has gone for the third consecutive interest rate hike and is pursuing the most rapid tightening of monetary policy since the 1980s. And the import cover of India’s foreign exchange reserves has already gone below the levels during the global financial crisis when it fell from 4 to 10.3 months.

What is Import Cover?

Import Cover measures the number of months of imports that can be covered with foreign exchange reserves available with the central bank of the country. Ten months of import cover is essential for the stability of a currency.

Causes for fall in foreign reserve

• Changes in the exchange rates of the basket of currencies that make up the reserves,
• Intervention of the Reserve Bank of India (RBI) in the foreign exchange markets.

What can be done?

A substantial reduction in both the trade and current account deficits and a significant pickup in the surplus generated in the capital account.

Government efforts

• Foreign investors have been allowed to purchase short-term corporate debt and invest in more government securities.
• It has also hiked bank deposit rates for NRIs and the annual limits for external commercial borrowing by the corporate sector.
• The decision to allow settlement of foreign trade in rupees will also help curb the demand for dollars.

Extra concepts:

About Baltic Exchange –

• The Baltic Exchange (incorporated as The Baltic Exchange Limited) is a membership organisation for the maritime industry, and freight market information provider for the trading and settlement of physical and derivative contracts.
• It was located at 24–28 St Mary Axe, London, until the building was destroyed by a bomb in 1992, and is now located at 38 St Mary Axe.
• It has further offices in Europe, across Asia, and in the United States.
• BIFFEX, the Baltic International Freight Futures Exchange, was a London-based exchange for trading ocean freight futures contracts with settlement based on the Baltic Freight Index.

Baltic Freight Index

• Baltic Freight Index stands for shipping and trade index which has been created by the Baltic Exchange based in London.
• It is a measure of the cost of transporting various raw materials.
• The Baltic Exchange contacts the shipping brokers directly for assessing price levels for a specific route, product, time and speed.