ternal e tor in ndia 15.3
the largest foreign exchange reserve holder
Definition (sixth largest in the world).
All economic activities of an economy which
take place in foreign currency fall in the external oPtimum forex – the riDDle
sector such as export, import, foreign investment, In recent times, there has been a debate over
external debt, current account, capital account, India’s optimum level of the forex reserves. The
balance of payment, etc. (definition).1 RBI is aware of the downside risks to the exchange
rate, as is reflected by its action of buying the
forex reserves US dollar. Officially, the RBI targets neither a
particular exchange rate nor foreign exchange
The total foreign currencies (of different countries)
reserves, and maintains such interventions by it to
an economy possesses at a point of time is its
just reduce volatility in the forex market. But in the
‘foreign currency assets/reserves’.2 The Forex
process of supporting weakening rupee, RBI needs
Reserves (short for ‘foreign exchange reserves’) of
to buy dollar, ultimately, leading to higher forex
an economy is its ‘foreign currency assets’ added
buid-ups. The Chief Economic Advisor of the
with its gold reserves, SDRs (Special Drawing
Finance Ministry, however, clearly stated the kind
Rights) and Reserve Tranche in the IMF.3 In a
of reserve accretion the government is looking at.
sense, the Forex reserves is the upper limit upto
Citing the example of China, the Economic Survey
which an economy can manage foreign currency
2014–15 said India could target foreign exchange
in normal times if need be.
reserves of US$750 billion to $1 trillion.
The latest position of India’s forex reserves,
Today, China has de facto become one of the
as per the Economic Survey 2017-18 is as given
lenders of last resort to governments experiencing
financial troubles. China, in its own heterodox
By January 12, 2018 India’s foreign and multiple ways, is assuming the roles of both
exchange reserves was US$ 413.8 billion an IMF and World Bank as a result of its reserves.
(10.7 per cent rise from end-March The question for India, as a rising economic and
2017). This included gold reserves of political power, is whether it, too, should consider
US$ 21 billion and Special Drawing a substantial addition to its reserves.
Rights (SDRs) with the IMF (inclusive
While forex reserves act as insurance when
of Reserve Tranche) of US$ 13.1 billion.
the rupee tends to be volatile against the dollar,
The import cover of India’s foreign there are costs attached to it. When RBI purchases
exchange reserves was 11.1 months at dollars in the spot, it leads to infusion of rupee
end-September 2017 as compared with into the system which leaves inflationary effect
11.3 months at end-March 2017. on the economy. Since the RBI does not want
Within the major economies running such actions to create inflationary pressure, so, it
current account deficit, India is among converts spot purchases into forwards. This way, it
1. Based on J.E. Stiglitz and C.E. Walsh, Economics,
is a direct cost because of the forward premiums.
(New York: W.W. Norton and Company, 2006), If RBI opts for open market operations (OMOs)
pp. 757-58. to mop up excess liquidity, that also involves costs.
2. Based on P.A. Samuelson and W.D. Nordhaus,
Economics, (New Delhi: Tata McGraw Hill, 2005),
RBI invests these dollars in instruments such
p. 604. as US treasuries, which offer negligible returns,
3. Ibid., pp. 605–07. owing to lower yields. But experts say these