Import Cover is an important concept in economics for the UPSC IAS exam. This article briefs you about this concept for the civil services exam.
An important indicator of the stability of a currency is import cover.
Import Cover Meaning
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. Eight to ten months of import cover is essential for the stability of a currency.
Import Cover India
The importance of building up and being able to sustain a higher import cover had been recognized by India’s policy makers even prior to the 1991 crisis. India had foreign exchange reserves which meant to cover import costs for two years. But, that was just sufficient to cover close to two and half months of imports only, because of crisis. India’s Foreign exchange reserve went up from $ 2.2 billion in 1990-1991 to $20.8 billion in 1994-95. During the currency crisis of 2013, when foreign exchange reserves fell to about $275 billion, import cover declined to about seven months. Presently, country’s foreign exchange reserves, which crossed $360 billion, could cover imports for 10.9 months.
Current import cover of India
As of January 2019, India’s import cover was 9.5 months. It fell from 10.9 in March 2018 because of four reasons chiefly:
- Stagnant forex reserves
- Weakening value of the rupee
- US Fed rates
- Lowering of (Foreign Institutional Investment) FII inflows
UPSC Prelims Question:
Consider the following statements:
- Import cover is the number of months of imports that could be covered for by a country’s international reserves.
- Import cover is an important indicator of the stability of a currency.
Which of the statements are true?
- Only 1
- Only 2
- Both 1 and 2
- None of the above