India must now put its massive forex reserves to better use
During the week, India’s forex reserves crossed the psychological $500 billion mark. India has come a long way from having just 15 days of imports as forex reserves in 1991 when she had to pledge gold to the Bank of England. Now there is a problem of plenty!
Forex reserves ranking
For the first time since the forex chest began to be recorded, India entered the top-5 in terms of forex reserves. India ranks behind China, Japan, Switzerland and Russia and has overtaken Taiwan, Hong Kong and Saudi Arabia. KSA, at one point of time held over $750 billion in its forex reserves but 5 years of weak oil prices meant that Saudi Arabia has been forced to draw heavily on its forex reserves despite cutting down on many of its welfare outlays. India can hope to overtake Russia soon. China leads the rankings with $3.5 trillion in reserves.
Why are reserves building up?
There are multiple reasons why the forex reserves are building up. Firstly, the sharp fall in oil import bill has brought down the trade deficit by more than 50% on a monthly basis. Secondly, the forex remittances from NRIs have been extremely robust with most of the world markets offering either zero or negative rates of returns. Lastly, RBI intervention in the forex markets has reduced substantially and that has also helped forex reserves build up.
Time for sovereign debt
In the Union Budget 2019, the Finance Minister had spoken at length about the proposal to raise money through the issue of sovereign bonds. Currently, Indian corporates borrow in dollars but the government does not have any sovereign debt. The idea of raising debt of $5 billion from the global markets was eventually struck down by the PMO on the grounds that it would add to the financial risk of the government and puts its sovereign rating at risk. The forex chest of $501 billion is sufficient to cover 14 months of exports even after the exports pick up to old levels. That is an extremely comfortable situation by comparable BRICS standards. It is time for India to seriously look at sovereign bonds to shore up its resources at a reasonable borrowing cost.
How about a Sovereign Fund
An Indian sovereign fund on the lines of Temasek, ADIA and Norwegian Pension has been discussed for some time now. A sovereign fund allows the leeway to invest the forex reserves in productive assets like global equities, high yielding bonds and real estate. The forex chest needs to be put to productive use rather than letting them idle in low interest assets like US treasuries. Sovereign fund would mean productive utilization of the reserves and also add heft to India as in investor in global markets. This is the time to make the best of reserves!
