The Hindu : Business : Forex reserves surge $3.75 b

Online edition of India's National Newspaper
Sunday, Dec 12, 2004

Business

Business

Forex reserves surge $3.75 b

By Oommen A. Ninan

MUMBAI, DEC. 11. Heavy inflow of investments, including foreign intuitional investments (FIIs), and a revaluation in global currencies resulted in India's foreign exchange reserves surging by a record high of $3.74 billion during the week ended December 3, to cross the $130-billion mark.

Although reasons such as revaluation of major global currencies and inflow of foreign funds were cited for this large increase in forex reserves, it accelerated further because of the intermittent attempts of the Reserve Bank of India by shoring up the foreign currency to stem the shooting up value of Indian rupee compared to the U.S. dollar. The central bank is having an agenda: keep Indian exports competitive.

Meanwhile, the foreign currency assets were also up by a record $3.55 billion to touch $124.76 billion and gold reserves went up by $189 million to $4.54 billion. The intriguing issue is that what would the central bank proposed to do if the foreign exchange reserve continues to flow at these levels.

In the last ten days, the rupee came from a low of 45.30 a dollar to 43.65 at the beginning of this week and closed on Friday at 44.75. This being the year-end (calendar year) for the FIIs there was some outflow of forex in the latter part of the week. But with inflows emerging from foreign direct investment (FDI) and with growing exports, dollars are in the process of coming into the Indian market. The Reserve Bank India is buying these dollars from the market in order to keep the exchange value regulated. If the RBI had not bought these dollars, the reserves would not have gone to $130 billion but the exchange rate of the rupee would have gone as strong as 40 a dollar.

"The RBI's regular dollar buying from the market was able to keep the exchange rate under control which leads to higher reserves," said K. N. Dey, a leading forex analyst. The high reserves also bring in high rupee liquidity in the market, which the central bank again has to suck out with the issue of bonds. "So if the current situation continues, at this level the reserves would touch $145 billion by March-end," Mr. Dey added. While comparing with China's forex reserves of $515 billion, India's forex reserves are at low levels. However, today India ranks among the first ten highest forex reserves in the world. The moot question is what is the ideal forex reserve, which India should hold.

The central bank has been shoring up the inflows of dollar to prevent the rupee from appreciating and this is now pointed out as one of the reasons for mounting forex reserves to unprecedented levels. This practice of market intervention was used by the RBI as a tool to keep Indian products competitive in the global market compared to products of other emerging markets. Other emerging markets too adopt this mechanism to stabilise (or to keep from appreciating) their currencies.

However, economists like Subir Gokarn believe that this fear is unfounded.

According to him "export competitiveness is relative." It depends how price sensitive is Indian export basket is. India has very few items such as textiles, which are of price sensitive but a large share in the basket are not price sensitive. In merchandise exports, pharmaceuticals and auto components are not highly price sensitive and the impact on profitability of gems and jewellery exports is insignificant as its raw materials are imported cheaper with the appreciation of the rupee. Among services, information technology is a high margin business and there will some impact on rupee margin but that is not the extent that the business will become unviable. Dr. Gokarn suggests that "We have to develop a full pledged domestic market for foreign currency" and the value of the Indian currency vis-a-vis other currencies would be determined by the market mechanism in totality. This would reduce the RBI's role unlike its constant intervention in the forex market. "It is tantamount to saying capital account convertibility." However, the forex reserve building will continue till the Ministry of Finance and the RBI will comfortable to open up capital account convertibility.

Printer friendly page
Send this article to Friends by E-Mail

Business

News Update

Stories in this Section

Exports rise 26 p.c. in November

Crude oil futures plunge

Consortium to buy stake in Idea Cellular

Canara Bank aims at becoming a global bank

Forex reserves surge $3.75 b

Anil Ambani adjudged `CEO of the year'