InvestorQ : Is the pressure on the forex reserves due to too much of FPI selling?
Rashi Mehra made post

Is the pressure on the forex reserves due to too much of FPI selling?

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Archita Jajjoo answered.
9 months ago
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When it comes to the falling forex reserves, there are two issues to consider. One is the problem of hot money or FPI selling as you rightly put it. Now FDI is not a concern as that is long term money. However, FPI money can move out at very short notice as we saw in 2008 and again in 2013. This year, since October 2021, FPI outflows in equity and debt has been to the tune of Rs215,000 crore. FPI flows remain the one big risk factor.

However, when reserves fall, the other big concern is the import cover which causes the sovereign risk. A key factor for sovereign rating agencies is the forex provides for imports. That was 12-13 months in the past and at the peak of COVID, it was 14-15 months. Today, forex cover is at 10 months of imports and could dip further to 8-9 months of imports if reserves fall further. It is time for the RBI to think up ways of boosting its reserves!

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