The Telegraph
Since 1st March, 1999
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Forex figure scales historic high
- Reserves top $100 billion

New Delhi, Dec. 20: India’s foreign exchange reserves today crossed the historic $100 billion mark, sparking celebrations at that pile of sandstone rock called North Block on Delhi’s Raisina Hill that houses the finance ministry.

For those interested in statistical minutiae, the figure touched $100.048 billion sometime late last evening when a forex dealer at State Bank of India clinched a routine currency deal.

That deal vaulted India into the big league of only five emerging market nations that have exchange reserves of more than $100 billion. Ranked fifth on the totem pole, India is just a notch ahead of Singapore and just behind Hong Kong. But it is still adrift of China — a nation it sees as its fiercest competitor for foreign investments — which boasts a reserves chest of over $400 billion.

But North Block and the rest of the country had more than good reason to celebrate this historic moment even as the Yuletide cheer spreads.

Thirteen years ago, on another cold, foggy December evening, a pall of gloom descended on the same sandstone building when India’s foreign exchange reserves plummeted to below $1 billion — enough to cover barely one week of imports. That was such an ignominious event that it forced then finance minister Yashwant Sinha to pledge India’s gold reserves to borrow dollars to meet the nation’s international debt obligations.

Deft financial management by Manmohan Singh, who took over as finance minister in 1991 for a five-year stint, saw India clawing back from the brink, stabilising its reserves and finally earning respectability.

“This is a historic high,” said finance minister Jaswant Singh as he celebrated the event with his team of top aides. “It will add greater momentum to bolder economic reforms... and contribute very significantly to national security.”

The road from agony to ecstasy took 13 years, but even as the finance ministry mavens prided themselves on the achievement, economists in Mumbai’s Reserve Bank went into a huddle to figure out how to manage the rising money stock because of the ever-increasing forex inflows into India’s bullish bourses.

The 89.5 per cent increase in the Mumbai bellwether 30-stock sensitive index since late April when the rally began — making India the second-best emerging market this year — has triggered a stampede by foreign fund managers who have shovelled a record $7 billion into India’s stock markets.

But there are a couple of worries as well. More dollar or euro inflows into the country also means more money in the hands of some Indians. When these Indians spend that extra cash in the domestic market, it results in more money chasing the same amount of goods sold. This triggers a spurt in prices.

Inflation this week ruled at 5.8 per cent, up by 1 per cent over the last three months and far more than the 3 per cent average last year. The Reserve Bank of India has been trying to check the rise in prices by sucking money out of the economy by selling high-value government bonds to people with money.

Even more worrying for the RBI’s money managers is the fact that about 30-35 per cent of the $100 billion forex reserves are hot money — short term loans, investments by foreign institutions in stocks and non-resident deposits — which can flow out of India just as easily as it came in at the first sign of trouble.

If foreign fund managers turn tail — it could be precipitated by any of a large number of factors ranging from a failed monsoon next year to another war in the region — India could experience a dramatic meltdown as East Asian nations suffered in the late 1990s.

To make things worse, foreign direct inflows, which is considered far more stable as it is invested in land and machinery, has come down to a trickle. In the first half of this fiscal, it was just over $1 billion — a far cry from the automobile sector-led FDI boom in 1997 when inflows topped $3.5 billion. That is why the managers of India’s economy in North Block are pushing for a hike in FDI limits.

Another worry is that more foreign exchange coming into the country also means a stronger rupee. The Indian currency now trades at a little over Rs 45 to a dollar compared with Rs 48.50 a year ago.

Economists fear that the rupee could harden to Rs 42 to a dollar. Indian exports would then become costlier in dollar terms and attract fewer buyers. India’s export growth has been sluggish in the last few months at 5-6 per cent compared with a double-digit growth just six months ago.

So, even as the buck flows in, the government needs to buck the resistance within the National Democratic Alliance to the process of second-generation reforms and head off the possibility of greenbacks flowing out of the country.

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