Is bulging ForEx reserve still desirable?

Society Business and Career
1

Our ForEx reserve position seems to keep going up up and up. At what point should we say enough and start using the reserves?

Forex reserves cross $92 bn

MUMBAI: With further inflow of $706 million during the week ending October 31, 2003, India’s foreign exchange reserves continued to swell to record highs crossing the $92 billion mark.
The country’s foreign exchange reserves surged ahead and during the week under review rose to $92,598 million from $91,892 million a week ago, according to the Reserve Bank of India’s weekly statistical supplement released here on Saturday.

The reserves have gone up mainly due to depreciation of dollar vis-a-vis other foreign currencies and fresh inflows.

RBI said the foreign currency assets also rose substantially by $706 million at $88,674 million.

The Reserve Tranche Position (RTP) with the International Monetary Fund decreased by $4 million to $1,205 million.

The apex bank said RTP may change from time to time due to India’s transactions under the Financial Transaction Plan with the IMF as well as changes in special drawing right exchange rates vis-a-vis rupee and dollar.

Gold reserves were down by $1 million to $3,920 million while special drawing rights remained static at $4 million, it added.

While loans and advances to Central government had a nil balance, that to state governments increased by Rs 556 crore at Rs 5,083 crore during the week ended October 31.

RBI said aggregate deposits rose by Rs 2,896 crore (0.2 per cent) to Rs 13,85,842 crore for the fortnight ending October 17.

Food credit decreased by Rs 3,221 crore to Rs 34,151 crore while non-food credit grew by Rs 2,300 crore to Rs 7,18,260 crore, it said.

2

Interesting indeed :k: that’s some money we are talking about.

Help me understand one thing though, how does the dollar depreciation (keeping in view the fact that your forex reserves are in dollars indeed), help to increase the forex reserves? :konfused:

I personally believe (and you have every right to disagree) that your forex reserves should equal at least 3 months worth of anticipated expenditure before you can place your surplus forex reserves at the disposal of global fund managers.

Pakistan has some odd US$12+ billion reserves at the moment and we have decided to place 1/3rd of these funds with global fund managers. These fund managers tailor a specific portfolio depending upon the investment needs of the fund provider country. I believe its better to employ your surplus (however you define them) reserves to generate additional income for the country.

3

The reserves should be used astutely to build better roads, research centres, city betterment etc. Even 20 billion can go a long way if there is no corruption involved.

4

^ er, i am not too sure if that is precisely how the reserves should be spent :~) you do that and soon you find yourself reserveless coz most of these infrastructure support activities that you mentioned are not commercially driven; revenues from toll taxes etc is miniscule to provide any kind of payback to the government.

IMO, reserves are just that, reserves. They act as a buffer to meet the government expenditure, when the govt. revenues (from tax collections, local and foreign borrowings, aids etc.) fall short of the anticipated expentidure during a fiscal year.

I agree to the corruption bit :k:

5

^ You're right of course. I was just making pies in the sky, hoping some of that excess money would be spooned off to make our cities look better. However that too is not a financial problem but a management/politician problem. Corruption again!

6

I think the reserves should be partially managed as investments like they are doing and at the same time used to reduce our debt burden which is HUGE ($30B+ I believe). Even a 1% interest rate on $30B is $300M each year! so we really need to cut that down. The same applies to India.

The reason you would want to use the reserves as investments instead of paying of debt is if you believe that you can make more profit on the money then the interest you have to pay. However, I am not sure if that is happening. At some point India needs to start investing the extra money on internal low priority infrastructure related projects because capital can very easily flow in and out of the country but the infrastructre is a more lasting assest. Ie. Move from short term investing into longer term investments (For Pakistan we have moved from survival mode to short term investments and hopefully in under a decade we can go to longer term investments)