Forex Scenario in India


Compared to the dangerous scenario which had occurred about 14 years back, the current forex situation is safe, but not what one would call comfortable. To understand the dangers that this country had at that time, one must move down history lane to the 1990's. During that time the foreign exchanges of India had dipped to such a low that the Indian Government was forced to send $400 millions worth of gold reserves to the Bank of England

The Reserve Bank of India Act, 1934 allows the RBI to store its gold up to a permissible limit. Keeping these rules in mind, the RBI had sent roughly 46.9 tonnes of gold to the Bank of England. The act permits the Reserve Bank to store 15% of its gold reserves abroad. The same act also permits the Reserve Bank of India borrow money up to a period of one month from any monetary authority against security for the same. So to defend its act the RBI had sent the gold against an amount of $405 million. This amount was secured from both the bank of Japan and the Bank of England against the gold that was deposited with the latter. Although these facts which were published in the annual report of RBI tried to hide the true story, the true fact was that the forex reserves were in an all time low.

The situation is not so bad at the moment. As of 28th September 2007, the foreign exchange reserves of India stood at a healthy $248 billion. Healthy indeed when compares to the $2,700 million of reserves that were there way back in 1990 when the fiasco had occurred.

Thanks to the economic policies of the Government of India, the export market has been increasing by leaps and bounds. New factories & industries are coming up every year and quite a substantial number of them are export oriented. Thanks to them, the amount of foreign exchange is also increasing. The world is now viewing India as one of the biggest players in the international market and is considered second only to China in the Asia pacific zone. According to the assessments made by various financial institutions, both public and private, it is clear that India is being seen by the world as one of the biggest up-and-coming economical market of the world. When the economy of a country grows in this manner, the forex scenario cannot be bad. In fact, such is the power of the India economy that it is being seen by the international financial market as one of the leading players along with countries like Brazil, China & Russia. The international market is keen to invest in this healthy economy and is even willing to pay huge commissions to get a foothold in the Indian market.

According to the foreign investors, the economy of India is being seen as not just growing, but one which is growing at a rate faster than that of the other countries of the world. The fact that many countries are setting up base in India also helps to strengthen the forex scenario. It is a well known fact that many foreign countries consider Indian specialists as a better bet than their own natives. The remittances sent back home by these Indians also contributes to swell the forex kitty. Apart from this the earning made by the BPO companies are also quite substantial. Most of the leading international giants prefer to set up their online help centers in India. Not only does this work out to be cheap for them, since Indian labor charges are lower than their foreign counterparts, but also due to the fact that the Indians are far more skilled than their foreign counterparts.

During the past four years, India, along with other international emerging markets had seen a rush in the flow of capital from the leading overseas markets. The past year has seen India over take all the other emerging economies and put itself in the number one position. Thanks to the fiasco created by the RBI in the 1990, India had to depend a lot on capital flows from overseas countries to make up for its deficit in forex. This was required because the amount of forex that India had with her was not sufficient to meet the remittances that had to be made for imports. Part of these capital flows were also utilized to pay the interest for the funds that were loaned from other countries. The situation has changed nowadays.

Due to the vast amount of accumulated foreign exchange along with those that are flowing steadily into India, this country is being forced to export this capital. The reasons for such steps are not just that the forex reserves should not be kept idle and should be invested, but also due to the fact that the RBI is looking towards different avenues to help suck up the surfeit capital that is flowing into the country. Reports being released by the RBI on diverse aspects regarding India's external payments are pointing to these types of operations.

The forex reserves of India, which stood at a healthy $248 billion as of the 28th of September 2007 is more than sufficient to meet more than 15 months worth of imports. When compared relatively with the import requirements of India, these reserves far exceed the demand. Ad to this is the factor that exports of software and other business along with the money flowing in from Indians working overseas had helped accumulate more than $28 billion during the fiscal 2006-07 and these alone were nearly sufficient to meet the import requirements of India. These situations have led to a scene where the Indian Government has relaxed its controls regarding the use of foreign exchange. Due to the huge surge of foreign exchange, there were just two options before the government of India. These were either to allow its residents to use more foreign exchange or to stem the input of foreign exchange. The government has chosen the former.


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