The Hindu Business Line : Four suggestions on forex reserve management

Chennai, Nov. 23 Import power plants, facilitate corporate borrowings, reduce dollar liabilities, and don’t squander away foreign exchange (forex) reserves.

These are among the suggestions that Mr N. A. Mujumdar makes in a recent book titled ‘Inclusive Growth: Development Perspectives in Indian Economy’ ( www.academicfoundation.com).

He extols the track record of the the Reserve Bank of India in managing the exchange rate as being ‘excellent’, while at the same time bemoaning the ‘total ineptitude’ and ‘monumental inertia’ in forex reserve management.

Though there is no set formula to determine the optimum level of forex reserves for a country, there is a threshold level beyond which the reserves maintained could be characterised as unproductive, the author argues. He suggests $60 billion as a liberal estimate of such a level, ‘equivalent to one year’s imports’, and the use of excess to import power plants. On November 2, forex reserves were close to $270 billion.

“Availability of power is acting as a constraint in industrial growth and hence, utilisation of reserves for import of power plants would confer great benefits to the economy,” reasons Mr Mujumdar, who was formerly principal adviser to the RBI.

He is aghast that corporates have to pay at least 6-7 per cent interest on overseas borrowings, even as the central bank earns ‘only 2 or 3 per cent of interest’ on reserves. “Of course, it is conceded that the RBI cannot lend directly to private corporate sector; but it is not beyond the ingenuity of the RBI to devise a mechanism to facilitate such borrowings.”

There seem to be stirrings. At the Economic Editors Conference, the Finance Ministry is understood to have informed on November 12 about the in-principle nod from the RBI to annually invest $5 billion of forex reserves in infrastructure projects through special purpose vehicles, and thus take forward the idea proposed in the Budget 2007.

On the ‘power’ front too, there is news. A story dated November 6 on www.chinaknowledge.com talks about the Essar Group importing $1 billion power plant from Harbin Power, China.

Towards reduction of dollar liabilities, Mr Mujumdar’s suggestion is the discontinuation of the convertible category of FCNR (foreign currency non-resident) deposits. “Those NRIs (non-resident Indians) keen to invest in India could do so in non-convertible rupee deposits.”

He is of the view that the RBI has been liberalising outward remittances ‘with reckless abandon’, by doubling the cap from $25,000 to $50,000 to $100,000 and, recently, to $200,000.

“Returns to private investment abroad are far from encouraging,” the author laments. Also, eerily, such dissipation of reserves by the RBI reminds him of ‘the frittering away of the huge sterling balances in the post-War period.’