‘IMF methodology is wrong’: Capitalmind CEO counters Shankar Sharma on forex reserves

Capitalmind founder and CEO Deepak Shenoy on Wednesday countered investor Shankar Sharma’s views on foreign exchange reserve adequacy, arguing that “net imports is the only way to judge reserves”. He also dismissed the IMF’s widely used methodology as flawed.

The exchange comes amid a broader debate over how India’s forex reserves should be assessed following recent declines in the country’s reserve stockpile and foreign direct investments (FDIs).

Shenoy argued that net imports provide a more realistic measure of reserve adequacy because export receipts and import payments occur simultaneously in the real economy.

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“Shankar bhai, net imports is the only way to judge reserves, and let me explain why,” Shenoy wrote on X. “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.”

He said imports and exports are closely linked in practice, noting that many imports are used to produce exports. Crude oil, for instance, is imported, refined, and then exported as petroleum products. If exports were to stop, corresponding imports would also decline, the Capitalmind CEO argued. 

“A lot of imports are used to then export. Which means we would have imported some crude oil to refine and send out petrol/diesel. This happens every month, and payments and receipts happen every month.”

“Assuming exports stop, then that means corresponding imports also stop suddenly and do not need to be paid for, and whatever imports are already in transit is going be paid for by whatever imports are in transit on the outward direction. Similarly, exports of services happen and don’t just stop. They are independent in some way,” he added. 

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Shenoy’s response came hours after Sharma defended the traditional import-cover metric used by central banks and institutions such as the IMF.

In a detailed post, Sharma argued that reserves must be measured against total import obligations because import cover is designed to answer a stress-test question: how long a country can continue paying for imports if forex inflows are disrupted. 

“Imports are actual foreign-currency obligations that must be paid in full. Exports may bring in foreign exchange later, but that cash is not guaranteed to arrive exactly when payments are due. So import cover measures the reserves needed to meet gross external payment needs, not the economy’s net trade position. That’s why net imports can mislead,” the investor said.

“If you used net imports, a country with large exports could look safer even if it still has huge gross import bills every month. That would understate liquidity risk, because reserves are used to settle the import side directly, while export receipts are uncertain in timing and may not be fully usable for immediate payments,” he added. 

Sharma also said that central banks and institutions like the IMF use import-based reserve adequacy because it is a conservative, easy-to-compare liquidity metric.

Shenoy, however, rejected that approach and questioned the reliance on the IMF methodology.

“The IMF methodology is wrong. We all know it, because of how different it works in reality, even in a crisis. And we have seen many crisis areas, 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 explain his position, Shenoy said countries do not operate in a vacuum where imports and exports occur independently of each other. 

“The practical example is that if you import $100 in a month and export $50 on what you have already produced, then you get the $50 at about the same time that you have to pay the $100, so you just need $50. At a country level, you do not assume that every single export fails to receive anything, while every single import has to be paid in full. It just is not practical.”

Shenoy also dismissed speculation around India’s reserve management strategy. “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 been declining in the last few weeks. RBI data showed reserves fell by $7.51 billion to $681.38 billion in the week ended May 22, after dropping $8.09 billion in the previous week.

India’s forex reserves had touched a record high of $728.49 billion in February before coming under pressure amid geopolitical tensions in West Asia and RBI intervention in the currency market.