Forex build up get more projects going

Forex build up get more projects going

The Reserve Bank of India (RBI) board is right to worry about the steady rise in foreign exchange reserves, which touched $538 billion on August 7, up $80.7 billion since the beginning of the year. Large reserves are seen as a source of stability, and an indication that India will not default on payments for its imports or debt servicing. The current level of reserves provide a 15-month import cover against the below 12-month cover before the pre-Covid period.

There is no point keeping large reserves locked up outside, with a fairly regular access to foreign capital and portfolio inflows. India’s forex reserves are not the product of current account surpluses, but represent unabsorbed capital inflows. Buying more gold is not an option either, given that gold prices are likely to fall when global growth resumes. The right solution is to boost domestic investment so that fresh projects would absorb fresh imports.

RBI intervenes in the forex markets to stabilise the rupee. However, RBI cannot buy too many dollars to restrict their supply in the currency market so that the rupee would not appreciate. A better alternative would be to allow the rupee to rise. A stronger rupee will make imports cheaper, and some domestic production would be replaced by foreign goods. All import intensive exports will gain from a strong rupee. It would keep inflation down and incentivise project imports. Consumers would gain with cheaper imports.

A section of industry that has a large exposure to debt would gain as their debt-servicing costs would come down. Of course, the export industry would be hit, and export earnings in rupee terms will come down. But the obsession over encouraging exports at any cost should end, given that a weak rupee would hurt company balance sheets and stock markets.