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In discussions on BoP, it is said that foreign exchange reserves built on the back of current account surplus is any day preferable to the surplus built on the back of capital account surplus. Can you please elaborate?

Your question can be answered by juxtaposing India’s and China’s forex reserves. China’s is built largely on the back of export surplus whereas India has always been having a current account deficit because its imports are much more than exports. In the event, its forex reserves are largely built out of External Commercial Borrowings (ECB) and Foreign Institutional Investment (FII) both of which can leave the country sooner or later. Inflows on capital account in the form of FDI are qualitatively much superior to both FII and ECB. Incidentally, China has been successful in attracting greater amount of FDI vis-À-vis India over the years.

S. MURLIDHARAN

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