The Modi government is examining if India’s foreign exchange reserves held by the Reserve Bank can be deployed for funding infrastructure projects or recapitalising public sector banks.
These bad loans-ridden banks, according to rough estimates of the Finance Ministry, would require capital infusion of about Rs. 40,000 crore over two years. India’s forex reserves touched a record $355.46 billion on June 19.
Unease in Ministry
The proposal, however, does not as yet enjoy unanimous support within the government. The idea, in fact, caused considerable unease in the Finance Ministry. “The government doesn’t own the country’s foreign exchange reserves,” a Ministry official said.
A former RBI Governor told The Hindu that the government could deploy the reserves held by the central bank for recapitalisation of banks. The government could also draw from the RBI’s balance sheet for this objective. However, he felt it might not be easy for the government to do so as the Board of the Reserve Bank had to approve it. “RBI will be loath to deploy reserves for such risky purposes and compromise BoP [Balance of Payment],” he said.
A source close to the Prime Minister’s Office said on Wednesday that the proposal was not entirely new and that it was discussed by the Manmohan Singh government too. No decision, however, was taken on it by the previous government, he said.
“One way of using the foreign exchange reserves or the Reserve Bank’s balance sheet for, say, the recapitalisation of banks is to float a special purpose vehicle,” the source said.
Chief Economic Adviser Arvind Subramanian said earlier this year that the Reserve Bank should aim to build a larger stock of foreign exchange reserves. “I think we should be targeting $750 billion to $1 trillion of reserves … I am not actually advocating that but I think one needs to think in those terms if we are a rising power,” Dr. Subramanian said adding that achieving this would be a complex exercise.
