Tap Diaspora Dollars … Now – on forex reserve issue

Source: The post is based on an article “Tap Diaspora Dollars … Now” published in The Times of India on 7^th November 2022.

Syllabus: GS 3- Economic Development

News: India’s economy is currently facing problems due to the increasing Current Account Deficit (CAD), declining forex reserves, inflation amongst others.

What are the concerns for Indian economy?

US Federal Reserve: The monetary policy adopted by the US Fed Reserve has impacted worldwide currencies including the rupee in India.

Forex Reserves: India’s forex reserves have fallen over $100 bn this year because India is spending its reserves to control the volatility of the rupee in the currency market. Even the value of other currencies included in the forex reserves have depreciated against dollar.

Slowdown in exports: Exports have slowed down in India due to the slow economic growth in the West as it is the largest export market for India.

What steps can be taken by India to control the volatility of the rupee?

First, it can leave rupee to depreciate totally depending on the market forces. However, this may increase inflation and disrupt businesses.

Second, RBI can raise interest rates higher and faster. However, they may affect the borrowers of loans and will impact the people with low incomes.

Third, India can raise a large amount of dollars through a special focused program. This would increase its forex reserves and control the rupee volatility. India has used this program in the past.

How has India raised dollar in the past through different programs?

India has previously raised dollars through various programs from the Indian diaspora.

1. a) the first time India brought dollars in 1998 due to the sanction imposed on it. It raised Resurgent India Bonds, b) the second time was in 2000 when rupee depreciated. It was tackled by issuing India Millennium Deposits, c) the third time was in 2013 when rupee witnessed a freefall. RBI raised $35 bn through a special FCNR deposit scheme.

However, raising dollars might be expensive but it shows India’s potential to tackle the economic situation and trust of India’s diaspora on India.

It also shows that India does not have funding constraints for its external liabilities and it doesn’t need to depend on foreign investment to finance its public debt.

What can be the course of action?

India’s domestic economic conditions are better than the past three time when it raised dollars. Therefore, India should consider raising dollars through various programs to control the volatility of the rupee and increase its forex reserves.