On 15th Jan 2015, RBI governor, Raghuram Rajan shocked Dalal Street with a surprise rate cut as he sought comfort in subsiding inflation. His step to not wait for subsequent monetary policy to announce the rate cut was quite uncharacteristic. It reflects the eagerness of RBI to revive growth through monetary policy tools at the earliest. While the rate cut was unanimously welcomed by markets and could be a sign of dovish regime ahead, it seems Dr Rajan also has some other measure up his sleeve that can give a big push to the growth agenda of the Modi government. And the measure is to shore up India's forex reserves.
As per an article in Mint, since the time Dr Rajan took over as RBI's governor he has added US$ 59 bn to India's forex kitty. Currently, India's forex reserves stand at record US$ 322 bn. Increasing forex reserves have numerous advantages. For one, it helps in currency management. If at any time, Rupee depreciates or fluctuates violently, RBI can simply sell dollars to provide necessary support the Rupee. Again, high reserves help in paying import bills. It also provides cushion against external debt payments that are about to be due.
But what are the ways to boost forex reserves?
Exports are main source through which any nation earns valuable foreign exchange. Providing incentives to exporters is one way to build forex reserves. Increasing global demand acts a natural booster as well. And in the case of Dr Rajan the latter factor has played a big role. What further acted as an icing on the cake is PM Modi's charisma as a no-non sense leader. He has instilled faith in the economy which attracted foreign investments into our country further helping fill the reserve kitty.
Over time increasing reserves would give more stability to Rupee and implant greater confidence in foreign investors about the India story. This coupled with PM Modi's reformist approach can certainly help India give the dragon nation a run for its money as far as bagging the crown for the fastest growing nation is concerned.