If you are above 25, maybe you remember the June of 1991. When India’s foreign exchange reserves of $900 million could barely finance two weeks of imports. The government had to mortgage gold with the Bank of England. And that’s when we were forced to reform. Cut to yesterday when forex reserves crossed a record high of $100 billion. That’s the amount of money that could build 19 Golden Quadrilaterals, each covering 5,846 km! Where are dollars pouring in from? • Foreign portfolio investment inflows, trade flows, re-negotiated debts, revaluation gains on the dollar’s weakness against international currencies. And, of course, NRIs Why we can show off • World is more confident of our economy, our exchange rate policy. And our cushion is now more resilient to shocks (like the currency crisis in the ’90s in SE Asia) • Will enable us to move faster to full float of the rupee on the capital account. In other words, you can freely exchange the rupee anywhere in the world • Higher reserves boost GDP growth in the long term, help in financing imports:kick-start investment, help upgrade credit rating and, in turn, bring in more dollars •RBI doesn’t need to buy dollars from the market which means rupee supply is reduced which keeps inflation in check What’s there to be worried about? •Returns: RBI will have to deploy it in various instruments abroad—mostly in US treasury bonds. But interest rates there are at a 45-year low of just 1 per cent •Not all of it is here to stay: Nearly a fifth of the reserves are brought in by foreign institutional investors (FIIs) via hedge funds. If they see other attractive destinations, especially in the US, they can pull out and send the Markets crashing • Shows that demand for dollar is weak, meaning our industries aren’t investing enough •Costlier rupee: Bad news for exporters whose earnings will fall and margins under pressure. More difficult to be competitive IF YOU: •Export: You will take a bit of a hit as rupee value will fall. If you import, banks have dollars to finance you • Travel: Already those absurd limits on how much you can take abroad have been eased, will be eased further. • Invest: Indirectly benefit from higher economic growth, low inflation, more industries, more employment etc. •Market confidence goes up.Foreign investors will bring in more funds. What should we do now? The Sunday Express asked experts: • R Sivaraman, Revenue Secy in the Dr Manmohan Reforms Singh Finance Ministry: Let the rupee be allowed to appreciate so that it finds its true value • A M Naik, CEO and MD, L&T: If the US economy revives, this money may flow out. Hence, we have to utilise it to continuously grow the economy. At the end of the day, greater economic growth is more important than huge forex reserves.
