Deepak Shenoy, founder and CEO of Capitalmind, has publicly challenged investor Shankar Sharma's perspective on the adequacy of foreign exchange reserves, asserting that "net imports is the only way to judge reserves." Shenoy also critically dismissed the International Monetary Fund's (IMF) widely adopted methodology as fundamentally flawed. This exchange occurs amidst a broader discussion concerning the appropriate assessment of India's forex reserves, following recent reductions in the nation's reserve stockpile and foreign direct investments (FDIs).
Shenoy contends that net imports offer a more realistic gauge of reserve sufficiency because, in the actual economy, export receipts and import payments often occur simultaneously or with a similar lag. He explained on X (formerly Twitter), "We pay for imports with a lag, and we receive export proceeds with a lag. Assuming that we will not get any export proceeds, while having to pay for imports is extreme overkill."
The Capitalmind CEO further elaborated that imports and exports are frequently intertwined. He cited the example of crude oil, which is imported, refined, and subsequently exported as petroleum products. According to Shenoy, if exports were to cease, a corresponding reduction in imports would also naturally follow. Similarly, he noted that service exports, while somewhat independent, do not simply halt.
Shenoy's remarks came hours after Shankar Sharma defended the conventional import-cover metric, which is favored by central banks and institutions like the IMF. Sharma argued in a detailed post that reserves must be measured against total import obligations. This approach, he stated, is designed to address a critical stress-test scenario: how long a country can sustain import payments if foreign exchange inflows are disrupted.
"Imports are actual foreign-currency obligations that must be paid in full," Sharma asserted. He highlighted that while exports might generate foreign exchange later, the timing of these receipts is not guaranteed to align with payment due dates. Therefore, import cover assesses the reserves required to meet gross external payment needs, rather than the economy's net trade position, which Sharma believes can be misleading. He warned that relying on net imports could make a country appear safer even with substantial gross import bills, thereby understating liquidity risk.
Sharma also underscored that central banks and institutions such as the IMF utilize an import-based reserve adequacy metric due to its conservative, easily comparable nature for assessing liquidity. However, Shenoy rejected this stance, questioning the uncritical acceptance of the IMF's approach. "The IMF methodology is wrong. We all know it, because of how different it works in reality, even in a crisis," Shenoy stated, adding, "net imports are the only real mechanism on which to judge reserves, not gross. The dogma that oh my god IMF is right because, well because it's IMF, is very wrong."
To illustrate his point, Shenoy provided a practical example: if a country imports $100 and exports $50 from its production in a month, it effectively only needs $50 in reserves, as the export receipts largely offset import payments around the same time. He dismissed the notion that every export would fail to generate income while every import must be paid in full as impractical at a national level. Shenoy also dismissed speculation regarding India's reserve management, stating, "And no, we didn't sell gold. And we've sold enough of our TBonds, and will continue to if FPIs keep selling."
India's foreign exchange reserves have seen a decline in recent weeks. Reserve Bank of India (RBI) data indicated a fall of $7.51 billion to $681.38 billion in the week ending May 22, following an $8.09 billion drop in the preceding week. India's forex reserves had previously reached a record high of $728.49 billion in February, before facing pressure from geopolitical tensions in West Asia and the RBI's interventions in the currency market.