$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.

Readers may mail their comments to editor@projectsmonitor.com