Finance, Forex and Investments

Whether GOI is keeping Dollars as reserve fund with Central Bank of America? Its implications on Rupee value?

RBI is keeping Gold as reserves for printing Indian currency. If India is keeping its surplus foreign currency in $ with USA then it is loosing its capital due to depreciation in value of $ vis-a-vis Rupee? Is India facing this situation? Why cann't India invest in purchase of other currencies which have a trend of appreciation in value? Raising CRR or reducing rate of interest on savings is not the right solution as it would result in financial crunch. and dishearten the domestic trade. Why cann't India use surplus foreign exchange to develop or procure items of Infrastructural support? Even if there is deficit financing or fiscial dificit, how is it adverse to our economic interest. USA is consistently using this method in its national economy. With Rupee going strong, why India is accelerating its policy of attaching no controls over valuation of currency when China is deliberately controling Yuan at under-rated value to serve its export policy and is trade surplus state.

Public Comments

1. A continuously appreciating rupee would compromise export growth and eat into aggregate growth rates. Hence, the RBI must intervene. The central bank needs to add to the supply of money to support the demand for money that stems from economic growth. If GDP were to grow by about 8.5 per cent in 2007-08 and inflation averages about 5 per cent, it would entail growth in money demand by 17-17.5 per cent. If the RBI were to support this configuration of growth and price increase, then the supply of money would have to grow correspondingly. The supply of money increases as a result of the interaction of an increase in reserves (or base money) and the money multiplier. A critical component of reserve money is the net foreign exchange asset (NFA) position of the RBI or simply foreign exchange reserves.