“How much Foreign Exchange reserves are enough?”

Recent depreciation of value of rupee has again raised a question whether India is vulnerable as far as Foreign Exchange (forex)reserves is concerned.“How much is enough” is a moot question as far as country’s forex Reserves are concerned. India has gone through lots of close shaves in terms of the need of forex reserves in the last three decades.

The inevitable economic reforms of 1991 were prompted by the Balance of Payment crisis. Alarming fiscal deficit 7.31% of GDP and revenue deficit of 2.44% of GDP in 1989–90 led the trigger and India had to pledge Gold reserves. The imprudent policy of Licence Raj ultimately sounded the death bell. Decades of deficit financing and borrowing by the government made inflation as permanent feature of the economy.Astuteleader, the then Prime Ministerlate Shri.Narsimha Rao opened gates of India and terms LPG i. e.  Liberalisation, Privatisation and Globalisation became integral part of the Indian Economy sans rupee convertibility which had to be gradual looking at the paltry forex reserves.

India was ironically insulated from the Asian crisis of 1997 due to capital account restrictions that ensured that hot money of hedge funds was always at the threshold. India had shut its doors in the desert to withstand the storm but that shut door policy also prevented strengthening the position.

 Second crises came up during the year 2013.After the US decided to gradually reduce the funding to its economy in 2013, the yields started growing in US. Naturally the money started flowing from emerging economies back to US. Then started what we historically call “taper tantrum”. India then had forex reserves of around 273 billion US dollars.  Apart from India Brazil, South Africa, Indonesia and Turkey were termed as “the Fragile Five” by Morgan Stanley investment bank analysts in 2013.These countries were highly dependent on foreign exchange investments. However in September 2013 India opened a window to attract FCNR dollar funds and at a fixed rate of 3.5 per cent interest per annum for three year tenor of the deposit. During this period Indian banks mobilised USD 34 billion and this helped Reserve Bank to strengthen itsforex reserves. India also hiked duty on gold imports and adopted 80:20 ratio for gold imports which made 20% gold to be re-exported. India successfully avoided the crises and even the redemption of these deposits in 2016 was clinical.

Ironically India stands at the top of the list  countries  as far as inward remittances are concerned .It received USD  69 billion in 2017  largest in the world, withlarge work force which serves on foreign soils.However if one takes a look at the remittances in last three prior years, it is observed that India received  substantial remittances i. e. USD 62.7 billion in 2016, ,USD 68.9 billion in 2015 and USD 70.4 billion in 2014. All this becomes ineffective when we consider import bill. India’s crude oil import bill has been perennially dependant on international politics. RBI’s reaction to stem the rot has been with a short term view. State run oil companies are the largest users of dollar. They need an average 450 million us dollars per day for the import of oil. No sizeable long term investment is done by the government to strengthen the oil fields in India to reduce its dependence on oil from outside world.

In a falling rupee scenario, no sizable contribution is made by exporters either to reduce the gap of balance of payment. As rupee depreciated so did the other currencies in the emerging markets which means no advantage for exporters.

In fact some of the countries have declined substantially than rupee.   It’s a tall order to increase the export with sluggish global demand.  Besides the likes of chemicals, gems or jewellery largely depend on imports for their raw material hence in a way it wipes of the comparative advantage to really gain from the export numbers.India’s forex reserves are almost USD 392 billion today.

Historically India has always attempted to enter in to Currency Swap pact between the countries .It’s an agreement which  allows trading the countries  in their own currency and payments to import and export trade at pre-determined exchange rate without bringing in the US dollars which dominates world over as yardstick. Recently India signed Currency Swap arrangement with Japan to the tune of USD 75-billion currency swap arrangement which is  50% higher than last swap agreement. Such arrangements serve as second line of defense. India can look for purchase of dollars from Japan in exchange of rupees. Recently India and UAE signed similar currency swap agreement albeit for an amount of USD 500 million .However India and the UAE bilateral trade was USD 52 billion in 2017out of which h non-oil trade accounted for USD 34 billion. India’s FDI into UAE in 2017 was USD $6.6 billion while the UAE’s investment in India was USD 5.8 billion.

Federal budget deficit is widening on account of USD 1.5 trillion tax cut. Federal Reserve is tightening its monetary stance. Fed’s stance implies that it will suck dollar liquidity from global financial markets. It has already raised its benchmark short-term interest rate thrice in 2018.India took several short term measures viz  withdrawing withholding tax on Masala bonds which was   a breather to foreign portfolio investors, and restrict non-essential imports and promote exports in order to hold the rupee. It also allowed easier External Commercial Borrowings. The government also banned the duty-free import of flat-screen televisions sets by slapping of 35 percent duty. It restricted the amount of dollar an Indian resident can take out of the country from USD 2,00,000 to USD 75,000 in a financial year. But what India really needs is to reduce the burden of import crude oil. That is only possible if it starts investing more for exploring crude by rigging from its own reservoirs or to buy the rights overseas. The other alternative is to move to the electric cars. Many manufactures have already earmarked money for electric car plants.Major disruption could be no more coal industry, no petrol pumps and goodbye  OPEC. Sounds terrific, isn’t it? Let’s hope for the best as we enter in to a new year.

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