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F E M P I: Oreign Xchange Anagement Olicy in Ndia
F E M P I: Oreign Xchange Anagement Olicy in Ndia
Vikash Bairoliya (4); Khagesh Chitalangiya (6); Mehul Jain (12); Niket Khatri (17); Subodh M Mallya (18)
Table of Contents
Overview of Forex policy over the years ...........................................................................2 From Control To Management ..........................................................................................2 Capital Account Liberalization Approach ......................................................................... 3 Current Scenario ................................................................................................................ 3 Group Insights & Suggestions ........................................................................................... 4 BIBLIOGRAPHY .................................................................................................................. 5
Summary Statistics Number of Pages: 3 Number of Graphs: 1 Table of Contents, Cover Page & Bibliography.
modified to meet our requirements. As a result of measures initiated to liberalize capital inflows, Indias Foreign Exchange Reserves (mainly foreign currency assets) have increased from US$6 billion at end-March 1991 to US$270 billion2 as on 9th November 2007. It would be useful to note that the Reserves accretion can be attributed to large Foreign Capital Inflow that could not be absorbed in the economy. This has been as a result of shift of funds from developed economies to emerging markets like India, China and Russia. FROM CONTROL TO MANAGEMENT In the 1990s, consistent with the general philosophy of economic reforms a sea change relating to the broad approach to reform in the external sector took place. The Report of the High Level Committee on Balance of Payments (Chairman: Dr. C. Rangarajan, 1993) set the broad agenda in this regard. The Committee recommended the following: The introduction of a market-determined exchange rate regime within limits Liberalization of current account transactions leading to current account convertibility; Compositional shift in capital flows away from debt to non debt creating flows; Strict regulation of external commercial borrowings, especially short-term debt;
The Guidotti Rule says that Usable foreign exchange reserves should exceed the scheduled amortization of foreign currency debts during the following 12 months. However this was amended to meet the Indian requirement 2 Source: Reserve Bank of India Weekly Statistics Publication (16th Nov 2007)
FOREIGN EXCHANGE MANAGEMENT POLICY IN INDIA
CAPITAL ACCOUNT LIBERALIZATION APPROACH Globalization of the world economy is a reality that makes opening up of the capital account and integration with global economy an unavoidable process. Today capital account liberalization is not a choice. The capital account liberalization primarily aims at liberalizing controls that hinder the international integration and diversification of domestic savings in a portfolio of home assets and foreign assets and allows agents to reap the advantages of diversification of assets in the financial and real sector. However, the benefits of capital mobility come with certain risks which should be categorized and managed through a combination of administrative measures, gradual opening up of prudential restrictions and safeguards to contain these risks.
CURRENT URRENT SCENARIO The main objectives in managing a stock of reserves for any developing country, including India, are preserving their long-term value in terms of purchasing power over goods and services, and minimizing risk and volatility in returns. After the East Asian crises of 1997, India has followed a policy to build higher levels of Foreign Exchange Reserves that take into account not only anticipated current account deficits but also liquidity at risk arising from unanticipated capital movements. Accordingly, the primary objectives of maintaining Foreign Exchange Reserves in India are safety and liquidity; maximizing returns is considered secondary. In India, reserves are held for precautionary and
The Reserve Bank of India (RBI), in consultation with the Government of India, currently manages Foreign Exchange Reserves. . As the objectives of reserve management are liquidity and safety, attention is paid to the currency composition and duration of investment, so that a significant proportion can be converted into cash at short notice.
Deployment of Foreign Exchange as on 31st July 2007
7 ; 3% 47 ; 24%
53 ; 27% 92 ; 46%
Deposits with other central banks, BIS & IMF Gold (including gold deposits)
As part of the group suggestions suggestions and insights, we will touch upon how the foreign exchange reserves can be deployed in a manner that will fetch higher returns ns without compromising compromi on the goals that are currently set for these investments. This is in addition additi to Capital Account Convertibility Issues. Issues
Publications Bank of International Settlement 2005 Following the Singapore model - S. Venkitaramanan The Hindu Business Line Stanford Institute for Economic Policy Research
Databases CMIE RBI Database (link from http://rbi.org.in) CSO Database on Foreign Exchange Reserves