Date:17/04/2007 URL: http://www.thehindubusinessline.com/2007/04/17/stories/2007041700610800.htm

Back Into the $200-b club

Forex riches funding India Inc's global expansion is better than the Government trying to use them.

It is symptomatic of the changing times that the news of India's foreign exchange reserves crossing the $200-billion mark should have almost passed unnoticed. That is optimism at its best. A nation that 15 years ago seemed to teeter at the edge of bankruptcy with just $500 million in its forex kitty can now merely nod at a surplus of $200 billion that pitches it into the Asian rich club; India now joins China, Korea, Taiwan and Japan in the $200-billion foreign exchange reserves league.

Predictably, a mindset that has moved from despair to joy at the swelling coffers is now beginning to wonder how best to use this embarrassment of riches. The Reserve Bank of India's traditional strategy of placing forex reserves in deposits and securities with modest returns no longer seems satisfactory. Singapore uses its surplus reserves to maximise returns through investments in markets around the world. China, with a trillion dollar plus kitty, has announced plans to set up an agency to manage, Singapore-style, a portion of its gargantuan kitty. With less than a quarter of that country's reserves, India may have a long way to go before contemplating the use of its welling reserves to earn more dollars in like manner. Before it contemplates such moves, the country needs to look at the nature of forex reserves and their sources. The bulk of the current reserves comes from growing foreign investments, burgeoning remittances and NRI deposits and surging receipts under Net Invisibles that constitute earnings from IT, software and other services. An analysis of data from 1991 onwards shows a steady increase in foreign institutional investments over the direct variety; but in the April to February 2007 period there has been a refreshing change, with FDI inflows at $11.879 billion outpacing FII inflows. Despite that change, remittances, external commercial borrowings and NRI deposits still constitute the bulk of accretions. In short, then, the nature of India's forex reserves remains unstable, a function of global financial and market trends beyond its control.

Yet, India's forex reserves do not lie idle. The rupee is increasingly convertible by individuals and companies. Data show that FDI is no longer a one-way traffic. Between October and December 2006, FDI inflows were just a tad higher at $8.7 billion than the outbound flows of $6.4 billion that fed India's appetite for acquisitions abroad. Gradually but surely India's forex reserves are funding Corporate India's global expansion. That surely is a better way to optimise the use of surplus forex reserves than the government attempting to do so.