The Hindu Business Line : `Embarrassment of riches'

REACHING the $100-billion mark in forex reserves is "a very important landmark," according to Mr S. Venkitaramanan. He should know. He was Governor of Reserve Bank of India in 1991, when the country's forex reserves were just enough to cover a week's imports because of a balance of payments crisis.

The first Gulf war had seen oil prices skyrocket. NRIs began to pull back their foreign currency deposits. And there was a considerable amount of short-term debt that was due for repayment. There was less than $1 billion in the kitty.

The Government was forced to pledge gold and draw lines of credit from the Bank of England and Bank of Japan in 1991, a move that he describes as "traumatic." Mr Venkitaramanan said that the RBI even sold around $200 million worth of gold in its coffers (seized from smugglers) as part of its response to tide over the crisis. India avoided any default on its external debt and lived to fight another day.

Mr K.P. Geethakrishnan, who was the Finance Secretary in June 1991, says that a default would have caused the rupee to collapse.

He says that when a country defaults on its debt obligations, the depreciation that takes place in its currency is not orderly.

Citing examples, he says the Russian currency tumbled from 6 roubles to a dollar to 6,000 for a dollar after default as did Indonesian rupiah which tumbled from 2,200/$ to around 19,000/$. A loaf of bread in Russia touched an astronomical Rs 1,000.

The balance of payments crisis "was a godsend because it toughened the system. Our economic reform program gathered momentum thereafter," Mr Venkitaramanan said. Mr Geethakrishnan recalls that the Government approached the IMF for an aid of $5 billion.

The forex reserves began to inch up slowly thereafter and have now touched $100 billion after a rapid spurt in the last two years.

Mr Geethakrishnan sounds a note of caution. He says that if the bulk of the flows that are coming in are long term then it would be feather in RBI's cap. Mr Venkitaramanan calls it "an embarrassment of riches" and a "challenge of affluence." But on any day this is a more pleasant challenge, when compared to knocking at the doors of various central banks with a begging bowl, he says.

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