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`Comfortable' forex reserves questioned

Ashok Dasgupta

NEW DELHI, Aug. 15

EVEN as the Finance Minister, Mr Yashwant Sinha, had taken umbrage to the downgrading of India's rating by Standard & Poor's and subsequently by Moody's last week, financial analysts in certain official quarters point out that the single notch scale-down by the international rating agencies was based purely on economic parameters ``without emotional attachments'' and, therefore, not unwarranted.

On the contrary, taking considerable solace from the ``comfortable'' foreign exchange reserves position, while Mr Sinha as also the RBI Governor, Dr Bimal Jalan, appeared to pooh-pooh the action of the rating agencies, analysts have raised questions on t he ``comfort levels'' of the forex reserves itself.

These analysts, wishing to remain unidentified, noted that if one were to ask them the question as to whether the country's foreign exchange reserves position was comfortable, their answer would be both yes and no.

Yes, because the forex reserves position at $43.809 billion as on August 3, 2001 is at a reasonably comfortable level. And no, if one were to take into account the various ingredients that comprise the total reserves.

Take the forex figures as at the end of April 2001, as there have been minor up and down weekly variations since then. India's forex reserves then, as at the end of April, stood at $ 42.526 billion. Of this, as much as $39.821 billion were held in foreig n currency assets (FCA), $2.695 billion in gold and $10 million as special drawing rights (SDRs).

Interestingly, of the $39.821 billion FCA reserves, the outstanding non-resident Indian (NRI) deposits in various accounts accounted for $23.819 billion. In effect, nearly 60 per cent of the total foreign currency assets comprise of outstanding NRI depos its.

Scrutinising this data further, it is seen that among the various NRI accounts, FCNR(B) and NR(E)RA - the two repatriable accounts - account for $9,289 million and $7,403 million, respectively. The repatriable stock of NRI balances thus amount to $16,692 million which, in percentage terms, is roughly 42 per cent of the total FCA reserves.

In recent times, two major resource mobilisation schemes were floated. These were the Resurgent India Bonds (RIB - August 1998) and the India Millennium Deposit (IMD - November 2000) schemes which together fetched about $9.8 billion. These also are poole d in the FCA reserves.

Analysts point out that since the repatriable NRI deposits are of a short-term duration, they do not represent any lasting stakes in the economy. Besides, the net investments by foreign institutional investors (FIIs), which stood at $831 million at the e nd of March 2001, is highly sensitive to market fluctuations as has already been experienced in recent times. Also, the RIB and IMD scheme proceeds have fixed tenures and have to be redeemed at the end of the stipulated periods.

Thus, taken together, the repatriable NRI balances, FII investments and the RIB and IMD proceeds total up to $29.323 billion. This represents nearly 70 per cent of the total foreign currency assets which can be said to have ``little lasting stake'' in th e economy. The NR(NR)RD balance, held in rupee-denominated non-repatriable account is also presumed to be held only for interest gains.

From the disaggregated composition of the FCA, analysts say it is clear that the proportion of foreign direct investment (FDI) - which actually represents the foreign investing community's lasting stake in the economy - is woefully short in the total for ex reserves. In effect, the composition of FCA is heavily biased towards funds that have been parked in the economy for earning purely short-term gains.

In such a scenario, in a crisis situation, there could be a bulk outflow of capital from the economy, given the fact that most of the foreign currency assets are short-term and flexible in nature with hardly any bindings on capital outflows. Such an even tuality, analysts say, may create a rapid depletion of forex reserves and lead to a BoP crisis.