Lend foreign reserves to govt companies

ANALYST'S VIEW

Comparisons are inevitable when India's exchange reserves position is juxtaposed against the Chinese. China is the world's highest forex reserve holder with over $1,430 billion in its kitty, with Japan a distant second at $946 billion.

At just a seventh of the Chinese figure at $262 billion, the Indian reserve level pales in comparison. Yet comparisons should stop there. The size of a country's forex reserve is strongly linked to the currency convertibility of that country and the currency internationalisation.

China continues to adopt an approach of gradual currency reform, whereas India is headed toward full convertibility. This policy has held the value of the Chinese Yuan at steady levels vis-à-vis the dollar, whereas the Indian Rupee continues its onward surge against the greenback.

But in as much as the value of the rupee continues to rule at normal levels against other currencies, it would be more appropriate to term the position as a dollar depreciation rather than the rupee's appreciation.

Funds find their way into the country on attractive returns from investments in the domestic market. Like the other central banks in Asia, India too is parking a major portion of its reserves in dollar. Such investments offer negligible returns of 3-4 per cent with absolutely no benefit to the country.

Currently, the government is issuing bonds and securities bearing an 8 per cent interest rate to mobilise funds to finance its fiscal deficit and other infrastructural investments. Instead, the forex reserves can be put to better use if the government borrows from the RBI at the same rate of 4 per cent in dollars itself. It can be in the dollar-denominated bonds and RBI alone will subscribe to them.

Another alternative that the RBI can explore is to help the oil companies to settle their payment obligations through a cheaper option by accessing these reserves.

The central bank may be permitted to lend to the oil companies through authorised dealers in foreign exchange at a cheaper rate of say 4.5-5 per cent. The oil companies can meet their import payment commitments in the foreign currency borrowed from RBI.

Yet this will definitely be a cheaper option than their present credit arrangements with commercial banks. Preferably, this arrangement can be routed through commercial banks for a fee.

The author is chairman and managing of Karur Vysya Bank.