Soaring Forex Reserves Worries RBI

Dollars are pouring in and India''s foreign exchange (forex) reserves are soaring, but RBI governor YV Reddy remains cautious about the quality of the country''s forex reserves. Recent data from RBI shows that India''s forex reserves touched a record $248 billion for the week ended September 28, the fifth largest forex reserve among emerging markets.

The surge in forex reserves has come largely on account of heavy portfolio, private equity inflows. Portfolio inflows alone have touched nearly $15 billion in 2007. This dominance of portfolio and private equity flows is worrying Governor YV Reddy, who says that the rise in forex reserves should be viewed with caution. Dominance of portfolio and private equity in forex flows still leaves us open to potential shocks, YV Reddy said.

Based on these concerns, Governor Reddy has dismissed suggestions that India should put some of these reserves to work and set up a sovereign wealth fund along the lines of China.

China recently set aside $200 billion from its forex reserves to invest in private enterprises, both domestically and internationally leading to suggestions that India should do the same. But Governor Reddy contends that the time is not right for India to move along that road.While the RBI is reluctant to use forex reserves for private investments, the central bank has agreed to set aside a segment of the reserves for use in domestic infrastructure projects. The RBI has agreed to provide $5 billion from the reserve kitty for infrastructure spending. Experts say that this itself is a first step towards putting the country''s reserves to better use.