India's forex record enhances optimism but could check exports

Monday, 22 December 2003, 08:00 Hrs
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NEW DELHI: As India crossed a milestone with $100 billion in foreign exchange reserves, analysts said while it reinforced the feel-good factor, the hardening rupee could stymie exports.

A little over a decade ago in 1991, India's reserves had dipped to below $1 billion and the country had to pawn its gold reserves. Last week the reserves touched $100.048 billion, Finance Minister Jaswant Singh confirmed.

The last few years have seen a swing in sentiments leading to a steady rise in forex inflows mainly by foreign institutional investors (FIIS) and non-resident Indians.

"The forex reserves reinforce the positive image of India and the sense of domestic confidence," Saumitra Chaudhuri, economic advisor with ICRA Ltd., a leading credit rating agency, told IANS.

"We are over one benchmark. Over the years this was bound to happen," said D.H. Pai Panandiker, a leading market analyst with RPG Foundation.

On the positive front, the highest ever forex reserves have created a positive image. On the other hand, the hardening rupee is creating considerable worry for exporters while putting targets further out of reach, say experts.

"These reserves are a result of the increased inflow of FIIs (foreign institutional investors) and non-resident Indians (NRI) deposits, expressing their confidence in the Indian economy. But at the same time this has led to the rupee hardening, resulting in our exports going down as a byproduct," said Panandiker.

The Reserve Bank of India will have to take some effective steps to mop up the excess liquidity in the market as it can create inflation, felt Panandiker.

Experts are of the view that the funds have to be channelled for development work and for pushing ahead economic reforms.

In a statement, Finance Minister Jaswant Singh Saturday said the accretion is set to add greater momentum to economic reforms and translate them into higher levels of investment and growth.

The historic $100 billion mark was achieved after India prepaid a high interest on external debt of $5 billion in the current calendar year and $5.5 billion for redemption of the Resurgent India Bonds, and contributed $498 million towards financial transaction plans of the International Monetary Fund.

"The high forex reserves have not so far made any impact, except to give a psychological feel-good factor to the economy. The forex reserves could be used in a more creative manner," said B.B. Bhattacharya, director of the Institute of Economic Growth.

"The important question is whether the reserves will remain in the country as a good part is foreign capital that was looking for a safe parking place and India with its stable economy provide a good location," Bhattacharya told IANS.

The phenomenon of rising forex reserves is being witnessed in all emerging economies, including China, where it is approaching the $400 billion mark, and Taiwan where it is perching at $200 billion.

In India's case too, experts are confident of the trend continuing for some more time in view of the stable economic and political situation in the country and the prospects of India's gross domestic product recording over seven percent growth in the current fiscal.
Source: IANS
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