The possibility of a major erosion in the value of Indian financial assets amounting to $ 300 billion deployed in developed countries has started ringing alarm bills in the government in the wake of persisting euro zone woes and downgrading of countries like the US,France and several developed nations.
What is more of an issue is the fate of the $274 billion of foreign currency assets (from a total of $305 billion of reserve assets) held by India. While $127 billion of these are held as deposits with central banks,the Bank of International Settlements (BIS) and the IMF,as much as $142.1 billion is invested in securities,consisting largely of government securities, says a commerce ministrys internal note.
The official note says with the uncertainty surrounding the value and soundness of public debt in these countries,the danger of the erosion of the value of those assets is now higher. For example,India holds $41 billion of US Treasury securities that have been downgraded recently by S&P. The balance is likely to be in the even more suspect public debt of European governments, it says. The countrys forex reserves are managed and deployed by the RBI. The RBI has never disclosed country-wise deployment of forex reserves.
The rate of earnings on foreign currency assets and gold,after accounting for depreciation,decreased from 4.16 per cent in July 2008-June 2009 to 2.09 per cent in July 2009 to June 2010 reflecting the generally low global interest rate environment.
In addition to this,banks in India,reporting to the BIS,have disclosed holdings amounting to $31.3 billion in financial assets abroad. Of these,$14.9 billion are the external positions of banks in foreign currencies vis-à-vis the non-bank sector abroad. These exposures too are vulnerable given the volatility in financial markets in the OECD countries. While the sums involved may be small (relative to the $1.2 trillion held by China in US Treasury bonds) they are of significance because of the nature of Indias reserves, the note says.
The note says the experience in Greece,Spain,Portugal and elsewhere suggests that finance capital is increasingly intolerant of what is perceived as excessive public debt. Though Indias gross public debt to GDP ratio declined from 75.8 per cent to 66.2 per cent between 2007 and 2011,it still is among the highest in the region compared with Malaysias 55.1,Pakistans 54.1,Philippines 47,Thailands 43.7,Indonesias 25.4 and Chinas 16.5 per cent.
But if a wrong downgrade can make a difference to the US markets and interest rates,so can it for India. It is in that background that we should view reports of S&Ps statement that fiscal capacities in Asian emerging markets,including India,have shrunk relative to 2008, the note says. This,it argues,would mean that in the event of a second global slowdown,the implications for sovereign creditworthiness in Asia-Pacific would likely be more negative than previously experienced,and a larger number of negative ratings actions would follow.