IN 1991, with forex reserves worth barely three weeks of imports, India went with a begging bowl to the IMF. Eight years later, on March 31, 1999, forex reserves touch a record $32.53 billion, enough to fund seven-and-a-half months of imports.
The figures are impressive, but how much is window-dressing?
IN 1991, with forex reserves worth barely three weeks of imports, India went with a begging bowl to the IMF. Eight years later, on March 31, 1999, forex reserves touch a record $32.53 billion, enough to fund seven-and-a-half months of imports.
An overflowing forex kitty is a confidence signal for the economy—despite a current account surplus, China has a forex reserve of $150 billion. So is this celebration time? The political uncertainty has put paid to such hopes. Even on the ground, a close reading of fluctuations in forex reserves throughout the past year shows that if the RBI didn't get $4.2 billion from the hugely successful Resurgent India Bonds (RIBs), we'd have seen a net erosion in reserves, not an accretion of $3.6 billion over the last year.
The buoyant reserves is a recent happening. The larger component of reserves, foreign currency assets (FCA) with the RBI, rose from $17 billion at end 1995-96 to $22.4 billion at end 1996-97 and $26 billion at end 1997-98. In 1997-98, with the rupee under pressure due to the East Asian crisis, forex reserves had depleted. A phase that spilled over into the last fiscal.
Only to be reversed in the second half, say senior finance ministry sources. Total forex reserves with the RBI (which comprise FCA, gold and special drawing rights for the IMF) came to $29.4 billion at end March, 1998. Of this, FCA was $26 billion. Over 1998-99, FCA increased by $3.6 billion. More interestingly, over half the increase in forex reserves—about $2 billion—came in March. The last week of the month saw an addition of a little less than a billion dollars, say RBI figures.
Is this spurt for real? Or another numbers game? Much of the scepticism arises from the fact that in a year when India went defiantly nuclear and invited sanctions, the forex reserves situation was defi-nitely not expected to be promising. So, a year-end window-dressing to show a clearly uninterested foreign investing community and frowning credit-raters that sanctions had no impact was expected.
Post-sanctions, as the rupee gyrated, the RBI actually spent $2 billion in open market operations to check volatility. To top it, exports nosedived even as non-oil imports remained steady, portfolio investments flew out, and other foreign capital investment, including NRI flows, slowed. Mainly to preempt a further erosion in reserves, the government went in for the expensive RIBs.
Of this, about $3.6 billion was added to RBI's reserves in August and September '98, taking reserves at the end of the first half to the levels seen at the beginning of the year.
That kind of solved the problem as the latter half turned out good. Exports improved, imports grew slower, the rupee was stable and invisibles receipts were buoyant in private transfers and software exports. Especially in the last quarter, FII inflows turned positive and net accruals to non-resident deposits picked up largely. With the forex market in surplus again, the RBI mopped up the funds to add to reserves. That and the net inflows of forex transactions by the RBI helped end the second half with $3.4 billion extra, says the finance ministry.
Marketmen differ from the government's account in two areas. According to a dealer in a state-run bank, a lot of money might have come through the external commercial borrowings (ECBs) route. He also points to an RBI-prompted year-end intervention through state-run banks to pad the balance-sheet to impress global agencies.
Economists also agree that ECBs have improved perceptibly compared to the year before, when they had hit a nadir. They feel that it's a good thing since it reflects increasing corporate prosperity. But finance ministry sources explain that ECBs take a good six months to mature, which is why they can't make forex flows rise suddenly. This year too, they point out, the ECB level is expected to remain at last year's, about $3 billion. Still, the ministry does not see the current forex level as high. It feels that with overall capital flows remaining anaemic, exports low and the current account deficit moderately high, this level can be called just comfortable, not very comfortable. Says an offi-cial: "This is a good average figure. The global situation is fluid, we don't know when we'll need to defend our currency. Import costs too may rise sharply." As it already has—oil and product prices have risen 35 per cent in the past few weeks.
But isn't carrying such a huge reserve a burden for the RBI? Says the offi-cial: "You get a poor return of 5-6 per cent instead of the usual 18-19 per cent, but it's a necessary evil. It's a sentiment-meter—a good forex situation helps buoy confi-dence in the economy." While the RIBs have served their purpose, the present political uncertainty may again force the government to drum up some other forex-earning scheme.