Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Rising Reserves: Dilemma of a different kind - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Aug 18, 2003

    Rising Reserves: Dilemma of a different kind

    Ever since our forex reserves have started reaching unprecedented levels (US$ 84 bn at the last count), the policymakers have been confronted with a dilemma of a different kind. How to cope up with this embarrassment of riches? A lot of people have started arguing that rather than allowing the reserve to idle away in low interest earning dollar deposits, it would be prudent to use those reserves in a manner that would help in the overall development of the economy. Therefore what should be the ideal level of reserves (to withstand shocks such as the rise in oil prices or of sudden capital flight), and what part of the reserves should be put to proper use. Let’s find out.

    Developing nations should have adequate reserves. Earlier, the norm was to keep the reserves at levels such that it should be possible for the country to meet its import bill for a certain number of months. But things are different today. A radical transformation has taken place in the capital market in recent years. In addition to trade deficits and economic growth (two major indicators of exchange rate movements), capital flows have also emerged as one of the indicators of exchange rate movements and these capital flows are potentially more dangerous than the other two. This is because it is short term in nature and more susceptible to mass speculation than the other two. Therefore, it is being increasingly felt that in addition to meeting import bills for a certain number of months, the reserves should be sufficient to cover likely variations in capital flows or the liquidity at risk.

    The capital flows of the type mentioned above, are mainly directed at a country’s capital markets and are non permanent in nature and hence can be taken out from the markets at a very short notice. The permanent capital investment on the other hand, reflects the confidence of the investors in the long-term growth prospects of the country. These investments not only add to the forex reserves but it also obviates the need for imports, as the goods are available in the local markets. But for all this to take place, the government has to create a proper climate and make substantial investments towards improving the overall infrastructure of the country. This is where the reserves can be put to use. The government can use a part of these reserves to improve the basic infrastructure such as roads, ports, and electricity so that the overseas investors find India an attractive destination to invest.

    The comfortable position of India’s forex reserves is making a lot of people to proclaim that the capital account convertibility process should be hastened. Capital account convertibility is nothing but giving someone an unrestricted freedom to convert his assets from one currency to another. Although full convertibility of the rupee is some distance away, there has been notable progress. Companies have been allowed to retire overseas debt ahead of schedule. They have considerably more leeway in acquiring foreign companies. Banks in India have been asked to confer convertibility status on a significant portion of their non-resident deposits. Very recently, fungibility of shares listed in Indian stock markets has become a reality.

    A non-resident shareholder can easily shift his investments between instruments listed in India and the underlying ADR/GDR listed abroad. Thus it would be fair to say that as far as conveniences on the personal and business front is concerned, rupee is for all practical purposes convertible. However, there should be restriction on short term external commercial borrowings and also on the freedom given to domestic residents to convert their domestic bank deposits and idle assets in response to market developments as these can make an economy extremely vulnerable and no emerging market can cope with such contingencies.

    Despite these avenues, the government seems to be gripped by a fear psychosis created due to the balance of payments crisis of 1991. However things are different today and the current reserves are unlikely to dwindle significantly in the near future as the economy is looking fundamentally more stronger today than it ever was. Therefore, the government will have to move away from the conservative policy framework, which it has been adopting for quite some time now, so that the full benefits of reserves are realized.



    Equitymaster requests your view! Post a comment on "Rising Reserves: Dilemma of a different kind". Click here!


    More Views on News

    Insider Leaks Equitymaster Stock Picks (The 5 Minute Wrapup)

    Jul 25, 2017

    Equitymaster HQ has been infiltrated. Valuable stock ideas have been leaked. Who's responsible?

    Raymond and Other 'For Profit' Companies Who Don't Care about Shareholder Returns (The 5 Minute Wrapup)

    May 27, 2017

    What happens when minority shareholders are short-changed in the normal course of business?

    Why Commission Driven Model In Mutual Funds Should Be Eliminated... (Outside View)

    Feb 15, 2017

    PersonalFN believes SEBI has taken a step back-apparently in the admission of it going overboard with the regulations.

    This Book Changed How I Looked at the World of Man and Money (Vivek Kaul's Diary)

    Aug 24, 2016

    And here's your chance to claim a free copy of this book...

    The Developed World is Dying because of Demographics, Debt, and Deflation (Vivek Kaul's Diary)

    Aug 12, 2016

    And Why India's demographic dividend could turn out to be a doubtful debt...

    More Views on News

    Most Popular

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    The Most Profitable Investment in the History of the World(Vivek Kaul's Diary)

    Aug 8, 2017

    'Yes, it looks like a bubble. And, yes, it's like buying a lottery ticket. But there's something happening that has never happened before. It's an evolutionary leap in money itself.'

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms