Q: Which of the following best describes the term ‘import cover’, sometimes seen in the news?
a) It is the ratio of value of imports to the Gross Domestic Product of a country
b) It is the total value of imports of a country in a year
c) It is the ratio between the value of exports and that of imports between two countries
d) It is the number of months of imports that could be paid for by a country’s international reserves
The correct answer is Option 4.
Import cover:
- Import Cover estimates how many months of imports may be covered by foreign exchange (forex) reserves held by the country’s central bank, in this case the Reserve Bank of India (RBI).
- Eight to 10 months of import cover is critical for the currency’s and economy’s stability.
- It is the number of months of imports that a country’s international reserves could cover. Hence, Option 4 is correct.
- It is a crucial indicator of currency stability, and a minimum of eight to ten months of import cover is required for currency stability.
- By taking early preventive action, import cover helps to avoid a BoP disaster.
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