The Hindu Business Line : The choke eases even more

The RBI has shown itself willing to let the growing forex reserves be put to the best use by Indian residents themselves, be they individuals or corporate bodies

Around the time when the country’s forex reserves had begun to gallop past the $100 billion mark, some analysts mooted the idea that the Reserve Bank of India should either invest its incremental reserves in assets that offered better returns than the securities of other central banks or let professional agencies do the job. For the past two years, the RBI has shown itself willing to let those reserves be put to the best use by Indian residents themselves, be they in dividuals or corporate bodies. Call it a conscious movement toward fuller capital convertibility or a reluctant loosening of purse strings by an overly cautious rich aunt; the fact is that the rules for the use of foreign exchange have been relaxed like never before. Two days ago, the central bank further loosened its strings.

Practical reasons may well have guided the RBI into allowing individuals corporates and mutual funds to invest more dollars abroad or prepay their foreign debt. The US Federal Reserve Board discount rate cut of last week presaged higher inflows on the back of a surge that has barely ceased since January this year. That month, the forex reserves stood at $177 billion; this month they have crossed $230 billion. The options before the central bank were either to sterilise that surge and let domestic liquidity stoke inflation, or let the rupee rise to below Rs 40 levels or, to prevent both, physically curb inflows. In a resurgent economy the last course would have been disastrous, the former two dangerous. The idea to use a part of the reserves for infrastructure development through offshore Special Purpose Vehicles is still in its infancy so the best bet for the RBI was the simplest — to liberalise capital outflows.

With $232 billion, India’s reserves are just $20 billion shy of South Korea’s and higher than Singapore’s ($147 billion), Hong Kong’s ($138 billion) and, more pertinently, Brazil’s ($162 billion) though still miles away from China’s ($1.33 trillion). Behind the figures is a less obvious story; the East Asian ‘tigers’ and now China are major exporters of capital — a feature that defines their developed nation status like it did the US and Britain earlier.

The measure of both forex management by the RBI and the depth of global outreach by the Indian economy will be increasingly determined not simply by the way it attracts capital but by the manner its inflows can turn outward. Viewed this way, the recent move by the RBI to raise the limits of dollar spends is more than just a financial easing. It is a movement toward fuller globalisation of the real economy.

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