Are We Using Our Forex The Right Way?

“We will have no hesitation in using forex reserves,” said former Reserve Bank of India governor, Raghuram Rajan while speaking at the FICCI-IBA hosted banking event in 2015.

In the week which ended on September 8, the forex reserve of the country accented by $ 2.6 billion and reached an all-time high of $400.726 billion (Reserve Bank of India data). Surely, we have come a long way from the 1991 crisis, when we were a forex starved country, but many economists argue that we haven’t yet adopted the right way to leverage our forex and this ample reserve can be used in a manner that can benefit our economy substantially rather using it in low-interest earning deposit.

According to a theory by John Maynard Keynes, a British economist, forex reserves are basically used by nations for three motives- transaction motives (carrying on international trade), speculative motives (transacting in the forex market for short-term gains) and precautionary motives (to use in unprecedented situations). Is it now the opportune time to add developmental motives to the list?

Renuka Jain, a financial advisor, told BW Businessworld, “Let $400 billion of foreign reserves build India’s infrastructure with no fear of dollar exiting India. Government’s Escrow account outside India for money stashed abroad under VDS shall act as a backup plan for outflow of foreign funds.” If we decide to spend the reserves for developmental needs, then, we must also come to a consensus on what part of the reserves should be put to use.

According to the Rangarajan Committee which was set up to think over the best possible use of forex reserves, the country should have sufficient forex reserves to pay the import bills of three months. Today, we have sufficient reserves to pay the import bills of approximately 12 months. Thus, it makes sense to divert the forex reserves to boost growth.

However, it should also be considered that the Reserve Bank of India is the custodian of the forex reserves, and if the government decides to spend forex on infrastructure, will it not mean an intrusion on RBI’s independence of taking decisions?

Yash Sharma, C.E.O, Quick Forex told BW Businessworld, "The Forex Reserve shouldn’t be used for infrastructural development as of now because for that we already have financial Institutions and government working through tax collection and other mediums. It is nowhere observable that the country is lacking infrastructural development due to monetary aspects.”

“The Forex Reserve is something which will help us to tackle any sudden natural or manual cataclysm and, even if we want our country to be flourished in terms of Infrastructure then I believe on priority we need better plans and campaigns, not the capital reserved for some unplanned debt or crisis situation,” added Sharma.

Among the countries with current account deficit, India has overtaken Brazil in the race of forex reserves and in the coming years, the reserves are likely to increase to an even higher extent. The RBI currently, invests the reserves in low return securities such as bonds issued by the developed nations such as the United States. So, a careful thought on whether the forex reserves are being used in the right way is sure to bring fruitful outcomes.