Forex reserves for hedging, can't use them to fund projects: Experts

Carry liability and not 'free' resource for funding

The country's foreign exchange (forex) reserves are accumulated from investment flows and are not "ours" as there are liabilities against them. Hence, the forex kitty works as a buffer against exchange rate volatility and is not for deploying to fund projects, said analysts and experts.

There is plenty of cheap money available in the country and abroad to finance viable infrastructure (infra) projects since central banks the world over, including in India, have infused liquidity to battle recession and fuel demand, they added.

The issue has come into sharp focus once again after Union Road Transport and Highways Minister Nitin Gadkari on Wednesday made a pitch for using the Reserve Bank of India's (RBI's) rising forex reserves for infra development like road projects. The country needs low-cost finance for such infra projects, he said, addressing the Confederation of Indian Industry.

India's forex reserves rose $9.42 billion to a level of $620.57 billion in the week ended July 30. The accretion to reserves has been to the tune of $43.6 billion since the end of March, according to the latest RBI data.

In fact, last month in an interview to Business Standard, RBI Governor Shaktikanta Das had said “that the reserves are not our own money. It is not that we have built it up by way of trade surplus”.

“If we have the reserves, we also have the liabilities against them. Capital flows are a strong contributor to our reserves,” Das had said.

Flagging concerns on the use of forex reserves for funding, Madan Sabanavis, chief economist, CARE Ratings, said just as the RBI absorbs excess flow, it has obligations to meet system requirements when foreign investors take out money. "So this pool of hard currency resources has a charge on it and is not available for deploying for internal purposes (like giving money to finance projects)," he said.

Aditi Nayar, chief economist at ICRA Ratings, also expressed reservations on the use of policy normalisation (read central banks raising policy rates) across the world not being far away. "This has the potential to trigger taper tantrums. We need to consolidate on forex reserve levels as arsenal to avert any crisis down the line," she said.

Former RBI governor Raghuram Rajan, who headed the central bank in 2013, when India faced the brunt of taper tantrum, is also vocal in his opposition to other uses of the forex reserves.

"India needs forex reserves buffer to insulate itself from exchange rate volatility as we have 'no friends' for swap lines. Japan was the only country that helped during the taper tantrum in 2013," Rajan had said last month, at a seminar organised by the National Council of Applied Economic Research.

Referring to the huge liquidity available in the market, Sabanavis said the RBI has infused liquidity into the system through targeted long-term repo operation at cheap rates for lending. "Also, liquidity is not happening independent of dollars. The RBI has been buying them, leading to infusion of rupee funds into the system," he said.

Seconding Sabanavis' views, Ananth Narayan, associate professor, SP Jain Institute of Management and Research, said it hardly makes any sense for the RBI to give commercial loans to infra entities in India, when so much of cheap funds are available in the market. "Any infra entity does not need the RBI loan to initiate import of capital goods for the project," he added.