One of the reasons for the rupee sliding sharply against the dollar is the Reserve Bank of India’s reluctance to support the rupee by selling dollars, like it usually does during periods of volatility. And there is good reason, why the RBI is avoiding what could well turn out to be a losing battle. As can be seen from the chart, India’s import cover–the number of months of imports that can be paid for by a country’s forex reserves – is at a 12-year low. The import bill has soared in the last few years, but forex reserves have not kept pace.
The import cover is calculated by taking the absolute annual import figure and then divide it by 12 months to get the average monthly import. Divide forex reserves at the end of the same period (Financial year end in this case) by average monthly import to get the import cover ratio.
For FY12, the import cover ratio is 7.2 months. It means that India has forex reserves to cover only the next 7 months of FY13, assuming the imports remain the same at USD 40.7 billion.