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Professional Banker Magazines:
Managing Forex Reserves : A Real Task for Asian Nations
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Forex reserves are rising in many Asian nations creating the problem of plenty. Asian nations need to think of innovative plans to save themselves from the imminent fall of the dollar value and the erosion of their reserves.

 
 
 

The Reserve Bank of India (RBI) has recently pub lished the ninth Forex Reserve Management Report. The report contains information with regard to the level of external reserves of India, its external liabilities, details of prepayment of external debt, etc. It also discusses the issue of adequacy of reserves. Indian Forex reserves have been steeply growing since March 2002, from a figure of $50 bn, to over $248 bn by September 30, 2007. They have crossed $280 bn mark recently. While the central banker invests the reserves in other currencies like euro, Japanese yen, pound, sterling, etc., for accounting purposes they are expressed in dollar terms only.

The break-up of reserves between various currencies is still a matter of confidentiality and the RBI does not disclose this information. However, many of our Asian neighbors periodically publish these figures. Indian foreign exchange reserves are not generated either through trade or current account surpluses. In fact, India incurs a significant trade deficit and modest current account deficit. It is the massive inflows in the form of foreign direct investments, foreign institutional investor funds, non-resident Indian deposits, external assistance, external commercial borrowings and foreign banks' capital funds that generate huge reserves. That is to say that the reserves are credit-driven and not export-driven. India's international investments, always at modest levels, have also been slowly rising. Illustratively, as per the data available as on June 2007, India had about $30 bn direct investments abroad, about $17 bn in portfolio and $3 bn in other investments.

With gradual relaxation of capital account convertibility restrictions since June 2007, these figures should have gone up further. One way to reduce the burden of rising reserves is to create better conditions for investments outside India. The rising reserves have to be viewed as a growing burden on the economy due to the recent rapid fall in the value of the greenback and the fall in returns from the US treasuries (in which most of the reserves are invested), following the recent interest rate cuts in the US. In any case, the return from treasury investments is always low, compared to the weighted average cost of accretion of these funds. There was not much scope for prepayment of high cost foreign currency loans of the government of India, as such prepayments, wherever considered profitable have already been made in the yesteryears.

 
 
 

Professional Banker Magazine, Professional Banker Magazine, Managing Forex Reserves Management, Reserve Bank of India, RBI, Indian Foreign exchange reserves, Foreign Direct Investments, FDI, Foreign Institutional Iinvestor Funds, International Monetary Fund, IMF, Bank for International Settlements, BIS, Organization of the Petroleum Exporting Countries, OPEC, Indian institution of finance company Limited, IIFCL.