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ENOUGH RESERVES IN THE KITTY
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Foreign currency assets at end-March 2002 amounted to $ 51.05 billion, up by $ 11.5 billion over $ 39.5 billion at end-March 2001. Out of this increase, a large part ($ 9.10 billion) was realized during the second half of 2001-02. Reserve accretion accelerated in the first three quarters of the current financial year, with foreign exchange reserves reaching a record high of $ 73.58 billion at the end of January 2003, an increase of $ 19.47 billion over the level of end-March 2002. A recent Reserve Bank of India study shows that the major sources of reserve accretion in the current fiscal, till end-November 2002, have been a surplus in the current account, non-debt creating capital flows and valuation gains. In spite of the interest rate differential of 3-4 per cent between the rates abroad and in India, there is no evidence to suggest that arbitrage through debt capital was substantial. Thus, at least upto November 2002, arbitrage may not have played a major role in accumulation of reserves. It is estimated that as much as two-thirds of the reserve accretion was on account of non-debt capital flows. Growth in foreign exchange reserves has facilitated a further relaxation of foreign exchange restrictions and a gradual move towards greater capital account convertibility.

The rapid growth in reserves was partly the result of a strong current account. After 23 years, the current account of India's balance of payments recorded a surplus — equivalent to 0.3 per cent of gross domestic product — in 2001-02. Stagnant exports and falling imports brought down the trade deficit by 0.5 percentage points in 2001-02. The current account showed a surplus mainly because of buoyant net invisible inflows equivalent to 2.9 per cent of GDP, which, at $ 14.05 billion, were the highest in the last decade. Invisibles are doing well in the current year too, primarily on account of a heavy inflow of remittances. This, coupled with a sharp rise in exports, considerably enhances the possibility of recording a surplus in the current account for the second successive year. According to the Directorate General of Commercial Intelligence & Statistics data, exports in dollar terms are currently (April-December 2002) growing at 20.4 per cent. Year-on-year exports in dollar terms grew by 34.3 per cent in December 2002. The surge in exports has occurred in spite of the sluggish pace of global economic recovery, and the slight appreciation of the rupee vis-à-vis the dollar, and has contributed to domestic industrial growth.

While merchandize exports have grown well in 2002-03, services exports have also been an important area of success reflected in net invisible inflows of $ 14 billion in 2001-02. India’s share in world commercial services trade is larger than India’s share in world merchandize trade. While software exports is a well-known success story, India is now an important venue for many tasks in services such as financial accounting, call centres, processing insurance claims, and medical transcription. The future potential for growth in these areas appears to be considerable.

The strengthening of the balance of payments has impacted on the monetary sector, with net foreign exchange assets of the RBI emerging as an important source of reserve money. From 9.1 per cent at end-March 1991, the share of net foreign exchange assets in reserve money, which had reached 78.1 per cent by the end of 2001-02, became 100.7 per cent on January 24, 2003, which is close to a currency board situation. Similarly, the NFA to currency ratio increased gradually from 14.4 per cent at end-March 1991, to 105.2 per cent as on March 31, 2002, and further to 127.7 per cent on January 24, 2003. For liquidity management, the substantial increase in foreign exchange assets was partly neutralized by the decline in the RBI’s net domestic credit. In the current financial year, RBI credit to the government remained negative, and reserve money grew by 2.9 per cent up to January 24, 2003, as compared to 4.7 per cent in the corresponding period of last year.

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