Comfortable forex reserve boosts India's image as creditor
NEW DELHI: Analysts say India's emerging image as an international creditor sends strong signals regarding the country's strength and resilience of its external sector to the global community.
"When you have a very comfortable foreign exchange reserve, the very first thing you do is to stop borrowing from others and pay back all outstanding loans, which India did in recent years," said economist D.H. Panandiker.
"After doing that, it is also a prudent move for a country like India to extend credit to other countries and agencies that are likely to give higher rate of returns," Panandiker told IANS.
"It's a good investment move than keeping the foreign exchange locked up inside the country."
According to Panandiker, a large chunk of India's foreign exchange reserve is parked in government securities of developed nations, mostly in U.S. treasury bills, which fetch barely two percent interest annually.
"On the other hand, India can get an interest rate of nearly five percent by lending to multilateral lending agencies."
The Reserve Bank of India (RBI), the central bank, Saturday said the country had joined the International Monetary Fund's (IMF) pool of lenders in view of its comfortable foreign exchange reserves position.
IMF has selected India to become a member of its Financial Transaction Plan (FTP) from the September-November quarter of 2002. Countries under this plan help the IMF finance the balance of payments needs of other nations.
"The IMF selects countries with strong balance of payment and foreign exchange reserves position for contributing to the FTP," said an RBI statement.
India's foreign exchange reserves touched a record high at $82.120 billion in the week to June 20. The country's foreign reserve has risen rapidly in the last few years on strong inflows from overseas and rising portfolio investment.
Enthused by the strong reserve, India has decided to put a curb on excessive borrowing and prepay all outstanding loans. The country paid back all its IMF loans by 2000.
New Delhi also reportedly prepaid foreign loans aggregating $1.67 billion to World Bank and another $1.3 billion to the Asian Development Bank last fiscal.
The government is also likely to prepay another $3 billion worth of costly foreign loans this fiscal in continuance of the exercise for reducing interest burden and fiscal deficit.
Finance Minister Jaswant Singh had indicated in the fiscal budget for 2003-04 that the government would continue to prepay foreign loans.
India has also framed a new set of guidelines for taking bilateral loans from other countries that would help minimise the federal government's commitment in repaying loans.
"Becoming a creditor to multilateral lending agencies and other countries will also boost India's credit rating status in the international market," said Panandiker.