The Hindu Business Line : Dealing with plenty

From a lofty position of decisive inaction the Reserve Bank of India over the week engaged in some reluctant intervention in the foreign exchange market to mop up some of the capital inflows to prevent a further drop in the dollar against the rupee, an exercise that created excess liquidity in the system. This prompted the RBI to mop up that excess wash of rupees with banks. In the first three days of October, the central bank had its hands full working the reverse repo to skim off nearly Rs 20,000 crore. With the MSS (Market Stabilisation Scheme) limit now raised somewhat, the RBI can soak up some more liquidity. Will that help?

That will, but only temporarily and if the flow of overseas investments over the next quarter eases up. If it does not, as is more likely the case, the RBI may find itself back to square one. If it intervenes, the money overhang will exceed MSS limits and may, according to some analysts push inflation to 6 per cent. That prospect, scary for any central bank, may force the RBI to swing back to its position of non-intervention, simply to cool domestic prices, in the process edging the rupee up against the dollar. In either case, somebody gets hurt. The key question for the RBI, indeed more so for policy-makers in New Delhi, is a strategic one about the country’s forex reserves. Assuming the country continues to attract foreign investments, and there is no reason why it should not, how does a government transform a problem of plenty into an opportunity? So far, the RBI has a partial answer in hiking the limits of overseas investments. But the scale of forex reserves, after accounting for adequacy norms, now demands new ways of productive deployment.

The plan to use forex reserves for part infrastructure funding remains just an idea, though a feasible one. Alongside, New Delhi should consider bolder investment strategies for the reserves deemed surplus. Creating new aid and loan packages, or tied credit lines for developing countries the way China is doing with its reserves in Africa, would establish beachheads in fresh and existing markets for Indian exporters and companies bruised by a rising rupee. The boldest would be to leverage the reserves together with those of China, Russia and other East-Asian economies and Brazil to create alternatives to The World Bank and IMF, dominated by US and Europe growth paradigms and leadership. Clearly, India would have a lot to teach developing nations with similar histories in poverty on ways to get out of it, democratically. While easing the RBI’s headaches, this move would propel India farther onto the world stage than any rhetoric can.

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