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