Mumbai: with only enough cash in Reserve Bank of India (RBI) to pay for seven months of imports, 172 billion dollars in debt falling due in the next eight months and weak fund flows, balance of undermining its ability to protect the tumbling rupiah.
Heavy dependence on imported energy, gold and technology means that India has historically run a current account deficit, which he funded by attracting foreign money into stocks, bonds and corporate investment.
But as global investors turn away from emerging markets in anticipation of the Federal Reserve system of the United States begin to Wind back its stimulus, weak external position India makes more vulnerable to outflows, and balance of payments deficit.
India has 280 billion dollars of foreign exchange reserves. That's just enough to cover the seven months of import bills, by far the lowest of the BRICS, the four major emerging market economies.Reuters
That left RBI with limited fire support rupee, which fell 12 percent from the beginning of May and a record low dollar 61.80 United States last week.
"India cannot afford to protect many with so little of the currency reserves," demographer said, refusing to be identified as he was not authorized to speak to the media.
The RBI said to consider three months of import cover to a minimum acceptable level, but some insiders of the Central Bank, is said to be uncomfortable that the reserves run down to the lowest import covers from 1996 onwards.
"Cover the lower imports continue to be a source of discomfort," said another politician.
"We wanted to increase the import cover. If there is a gap in the SDS, the currency will take a hit. "
However, India is not looking to repeat its 1991 crisis. Then with only enough reserves to cover three weeks of imports, the Government was forced to declare their gold in order to pay their bills and had to push through reform, to start opening up the economy.
In the fiscal year that began in April stocks attracted a net $ 2.3 billion in inflows, but if that changes India might find itself with balance-of-payments deficit. There has been a net outflow of debt of about $ 5.7 billion.
Stocks accounted for a whopping $ 220 billion of foreign establishments in India, according to the Bank of America-Merrill Lynch. The debt amounts to a relatively small $ 81 billion in foreign assets, government data show.
India ran balance-of-payments (BoP) in 2008/09 and 2011/12. He posted a small surplus of 3.8 billion dollars in 2012/13 year which ended in March, but some economists expect it to slip back into deficit this financial year.
Everything up to the end of this fiscal year, India needs to refinance or repay the $ 172 billion of obligations — for example, foreign loans, trade credits and private debts — which is nearly 45 percent of its total external borrowings and the equivalent of 59 percent of its reserves.
"We are vulnerable now," said Abheek Barua, Chief Economist of HDFC Bank in New Delhi.
"If this vulnerability is evident in one big by default to internal loans or outside commercial borrowing, it can threaten a sovereign rating, and that could trigger a balance of payments crisis," said Barua
Any default is seen as more likely to be on domestic debt, but the risk it will spoil the General investment environment and hit the already slowing economic growth.
Investors are hoping the appointment of Raghuram Rajan, former Chief Economist of the IMF, as Governor of the RBI, helps to speed up measures to stabilize the rupiah.
Rajan said the sovereign or quasi-sovereign dollar bonds to attract inflows of dollar, widely regarded as an effective, if expensive, temporary measure to support the rupiah. Outgoing Governor Duvvuri Subbarao opposed the issuance of sovereign bonds.
THE CURRENT ACCOUNT DEFICIT
Although the Government has set curbs gold imports and other measures to reduce the gap in external accounts, investors and economists believe more needs to be done to attract long-term funds to help balance the external accounts.
The current account deficit, –permanent 88 billion deficit exists, or 4.8 per cent of GDP in 2012/13 — but there are restrictions on what you can do to reduce it.
The Bill for oil, the largest and most inelastic import India was 169.4 billion dollars in 2012/13, and the weak rupiah only push up costs.
HDFC Bank Barua expects that India will end up with a balance of payments deficit from $ 12 to $ 15 billion in 2013/14.
"We are close to a crisis, seen in 1991 year, but cannot be excluded from the field of possibilities," he said.