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Our Bureau

Mr Alan Jacobs

Chennai , March 14

THE COUNTRY'S foreign exchange reserves of $136 billion is much higher than the country requires, Mr Alan Jacobs, Senior International Economist and Strategist, AMP Capital Investors, said on Monday, while answering a question at an interaction with journalists here.

He said that interest rates in India, especially at the short end, were "too low." Low levels of interests could lead to unnecessary investments, which may not be good in the long run, Mr Jacobs said.

He pointed out that India (like many other Asian countries) had decided not to let the currency appreciate. The high foreign exchange reserves were a consequence of the policy. Because of RBI's intervention and the subsequent sterilisation to suck up excess rupees in the market the central bank was left with huge reserves and the people ended up with government bonds on their hands, Mr Jacobs said.

Answering another question, he said that as a matter of principle, spending foreign exchange reserves in the domestic market (such as for infrastructure development) was not good, because it amounted to "printing more rupees," with inflationary consequences. However, he noted that India was planning to spend only about $2 billion out of the reserves — a small amount to have any bad impact.

The low interest regime was also a consequence of the policy of intervention in the forex market. "You can manage the currency rate or fix the interest rate, but you can't do both," he said.

Mr Jacobs said that AMP's internal research projected a growth rate of 6.6 per cent for India in 2005. He said that the stock markets would continue to do well. The market rally this time, unlike in 2000, was not a bubble, because this time around stock prices closely tracked companies' earnings, Mr Jacobs observed.

On the global economy, he said that there would be a slowdown in 2005, but 2006 would be a better year.

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