Mr Jaitley, use India’s foreign exchange reserves to build badly needed infrastructure!
Exactly four years after the country’s foreign exchange reserves plummeted to $ 274.8 billion in September 2013 - a week after the rupee touched nadir against the dollar - reserves have now surpassed $400 billion - for the first time in history. The country’s foreign exchange reserves were at $ 402.5 billion, as on September 15 - latest data released by the Reserve Bank of India shows. Read On ..
The central bank’s foreign exchange kitty swelling by over $125 billion in four years is commendable. The so called ‘taper tantrum’ of the US Fed in the middle of 2013 took a toll on emerging market currencies and India was identified as one of the ‘fragile five’ nations - that are too dependent on unreliable foreign investment for growth.
Following a series of steps by both the government and RBI, including the opening of a window to attract foreign currency and the imposing of import curbs on non-essential items like gold - the exchange rate started to stabilize. The prospect of a stable government coming into power in the next general elections also gave comfort to foreign investors. And there was no looking back, as the central bank’s foreign exchange kitty continued to swell.
At the end of September 2016, when foreign exchange reserves were at $372 billion, the import cover increased to 12 months from 10.9 months at the end of March 2016 - RBI said. In the last one year, reserves have gone up by another $ 30 billion.
The foreign currency assets comprise multi-currency assets that are held in multi-asset portfolios as per the existing norms, which are similar to the best international practices followed. Liquidity and safety constitute the twin objectives of reserve management in India.
While foreign exchange reserves are at a historic high, import cover is lower than 2007 levels when the cover was over 15 months.
As a result, currency experts are of the view that the central bank will continue to mop up foreign exchange reserves. Apart from adding to import cover, there is also a thinking that it could be used for boosting economic growth.
"Two quarters of back-to-back sub-6% growth, a reflection of demonetization and GST-led "temporary disruption" in the economy, have raised worries regarding the likely shape and speed of recovery in the coming quarters, even as stock markets continue to soar to new highs driven by a supportive flow dynamic. Indeed, the divergence is quite stark," a research report from Deutsche Bank said.
The country’s economic growth fell to a three-year low of 5.7 per cent in April-June, mainly due to the disruptions caused by uncertainty related to the GST rollout amid slowdown in manufacturing activities, as well as impact of demonetization, which still continues.
While there is a thinking among business houses that the government should provide a fiscal stimulus to boost growth as well as sharp interest cuts by RBI - the space for both seems limited. A fiscal stimulus could make the fiscal deficit target for 2017-18 - set at 3.2% of GDP - difficult to attain. An inflation wary central bank, which is now answerable to the law makers to achieve its inflation target, will also find it difficult to reduce interest rates sharply. Consumer price index-based inflation or retail inflation was 3.36% in August - highest in 5 months - though below RBI’s medium term inflation target of 4%.
Hence, the foreign exchange reserves may be the tool that can be used to boost growth.
"Given the lack of considerable space both on the monetary and fiscal front to support growth, there is some merit, in our view, to consider non-traditional ways of freeing up resources for supporting growth. One possibility is to use FX reserves for funding growth-critical public infrastructure projects. This idea has been discussed in the past but not implemented due to concerns on inflation, fiscal deficit and fear of sudden stops in capital flows. But currently the macro backdrop is significantly different, which could merit a favorable decision", Deutsche Bank report said.
As a practice, the central bank deploys its foreign exchange reserves in low yielding US treasury bonds and other sovereign bonds which entails quasi fiscal cost. It has been argued that a small portion of the foreign exchange reserves can be used for financing the huge infrastructure requirement of the country.
"The question to answer is whether a drawdown of reserves by USD15bn would change the external position materially and if the answer is negative, as our calculations show, then whether it makes sense to use a small part of the reserves for boosting growth-critical public investment, particularly in infrastructure", the Deutsche Bank report said.
- TradeBriefs Bureau -
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