In “Till the music stops” (October 4), A V Rajwade emphasises that foreign exchange (forex) management needs to focus on the growth of the real economy and job creation. The forex management is slanted towards the flow effect. When foreign institutional investors (FIIs) invest heavily in Indian stocks and debt instruments, forex reserves increase and the rupee appreciates. With this, the input of raw materials and capital goods become cheaper, external commercial borrowing increases and many companies make initial public offers. Retail investors have to look at the “superhighway” economy from the ground. If FIIs are allowed to invest in disinvestment, the fiscal deficit may come down. The other effect could be a fall in exports, and the government may have to give more incentive to retain exports. The import of raw materials becomes cheap and this can affect Indian industry. The imported capital goods’ impact on vendor development would be different from indigenous capital.
Since domestic growth is partly financed by external commercial borrowings, invisible outflows would increase over a period of time. It would be interesting to know the effect on the overall economy. When G7 countries faced forex volatility, they agreed under the Louvre Accord of 1987 to jointly intervene in the forex market and coordinate monetary and fiscal policies. After 2008, the G20 was formed, of which India is a member. In an off-the-cuff remark, the finance minister said countries cooperated to stave off the crisis, but in normal times much cooperation is not forthcoming. After 20 years of reforms, India is still talking about developing its infrastructure. It would be better if we depend more on our own resources and try to tap the forex account lying outside the country.
T S Ramanarayan, Mumbai