Forex Reserves
Back in 2004, when our forex reserves had touched the 100$ b mark, some of us were intrigued by our government's so-called want of funds for investment projects. Why wouldn't they use the forex reserves for that, we wondered.
Today RBI has forex reserves of worth 110$ b, and still we are looking for finance, primarily equity finance in form of FDIs and FIIs. Why?
As per my limited understanding, RBI primarily needs forex reserves for the following purposes.
1. To stabilize the exhange rate value of Rupee in forex market.
2. To assure the investors about our pay-back capacity and prevent capital flight.
If these reserves are used for investment projects (or to sponsor continuing fiscal deficits - by buying government bonds) then investers might lose confidence in our market and in state of panic might prefer to pull out their money. And we need foreign money to cover our current account deficits (remember S-I=NX).
So we need to keep dollars to invite dollars! And what about the opportunity cost - the interest on that huge reserves that we forgo?
Today RBI has forex reserves of worth 110$ b, and still we are looking for finance, primarily equity finance in form of FDIs and FIIs. Why?
As per my limited understanding, RBI primarily needs forex reserves for the following purposes.
1. To stabilize the exhange rate value of Rupee in forex market.
2. To assure the investors about our pay-back capacity and prevent capital flight.
If these reserves are used for investment projects (or to sponsor continuing fiscal deficits - by buying government bonds) then investers might lose confidence in our market and in state of panic might prefer to pull out their money. And we need foreign money to cover our current account deficits (remember S-I=NX).
So we need to keep dollars to invite dollars! And what about the opportunity cost - the interest on that huge reserves that we forgo?
posted by Abhishek* at 8:24 AM
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