Need for judicious use
When one door of happiness closes, another opens; but
often we look so long at the closed door that we do not see the one which has opened for us.
—Helen Keller (1880-1968), champion of deaf & blind
$200 billion Forex Pile-Up
The country's forex reserves crossed the $ 200 billion mark
and scaled to $ 200.32 billion by April 6, 2007. We had recorded the first $100
billion amass on December 19, 2003, and it took us only around 39-and-a-half
months to score the next $100 billion achievement. The forex reserves are around
120 per cent of total external debt and cover around 13 months of import. Also,
RBI's nine-tenths of assets are in US dollars.
So far as the first $100 billion mark is concerned, there was less debate on the
advisability of forex build-up as with just around $1 billion in forex kitty,
the country had almost defaulted in payment obligations for import and debt
service in mid-1991. But the second $100 billion build-up has raised various
issues regarding prudence of such affluence as it has given RBI testing times in
managing rupee and continuous and huge liquidity mop-ups, rate hikes, etc, as
monetary response to inflation and inflation expectation.
In fact, it is suggested that RBI should be less aggressive in dollar mop-ups,
allow rupee to appreciate and spare the domestic economy from harsh monetary
measures that tend to push up cost of money. But given the need for RBI to
contain rupee value for the sake of exporters or the prudential forex holding
norms and buy dollars, it is recommended that the government should consider how
the forex reserves could be garnered for fund-starved domestic infrastructure
investments. Incidentally, China, which has over $1 trillion of forex reserves,
is also reportedly mooting such ideas.
Thus, as per the Finance Minister's budget speech in February, the government is
considering partial use of foreign exchange reserves by foreign subsidiaries of
the Indian Infrastructure Finance Corporation Ltd for financing expenditures on
imported inputs for infrastructure projects, or use them as collateral for
larger international loans.
The idea has apparently not found favour with ADB which holds that foreign
exchange spending on infrastructure projects is limited, and moreover RBI should
be the ultimate arbiter of how much accumulation of reserves is "adequate."
Here, it may be noted that though forex reserves exceed external debt by a fair
margin, what should cause some uneasiness is that a half of the $142 billion
debt (as of December 2006) is in NRI deposits and commercial borrowing. In
addition, the non-debt, but fickle FII investments amount to over $52 billion.
Thus, forex reserves may be accessed for infrastructure projects to make them
particularly more cost-effective, its use would have to be judiciously
orchestrated, keeping in view, among other considerations, the composition of
debt, non-debt foreign capital flows.
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[16 April 2007]