forex reserves - to use or to showcase?
Yesterday’s Business Line carried an interesting article "Policy debates: Quality & Quantity" by Mr A V Rajwade, the respected authority on forex and derivatives. Among the various points he discussed one was about use of the foreign exchamge reserves. He considered the suggestion from FinMin for use of the reserves for infrastructure as a bad idea on account of following:
a. Regulatory, legal and other issues are major constraints rather than resources;
b. The reserves are not idle: an equivalent number of rupees have been released in the economy when dollars were bought and these rupees are meeting the economy’s financing needs; and
c. We would be using reserves to an extent of $20 billion in the current year for financing the deficit on current account.
I mayn’t be able to appreciate completely the concerns of the FinMin and Mr. Rajwade but was wondering if the reserves, to a small extent, be used for the non-developmental activities, which otherwise put a strain on the fiscal deficit. Though the return of such investment of reserves would be zero but in the larger interest and given that a contained fiscal deficit will attract further reserves, won’t the method help?
