The Asian Development Bank has criticized the finance ministry’s proposal to use the country’s foreign exchange reserves for building infrastructure and said such a move would raise the government’s liabilities, impose a tax on imports, and cause the rupee to appreciate.
It also said the move “would undermine the Reserve Bank of India’s (RBI) autonomy as it attempts to navigate the economy towards fuller capital account convertibility.”
Supporting the central bank’s decision to acquire reserves for “prudential reasons", which means financial security, ADB says in its Asian Development Outlook 2007, it should be the final arbiter of how much reserves should be “adequate.”
The bank argues that using the India Infrastructure Finance Co. Ltd (IIFCL), wholly owned by the government, to borrow foreign currency from RBI would raise overall government liability.
It says that using one IIFCL subsidiary to lend for imports would not be very useful as most infrastructure inputs are not imported. The bank also points out that using the reserves as collateral for borrowing abroad would contribute to currency appreciation .
That would lead to a situation where the central bank would have to mop up foreign exchange to keep exports competitive; this move would be tantamount to a tax on imports, says ADB.
Calling for better management of burgeoning reserves by Asian countries to earn more, the bank said “having an appropriately regulated ‘fund,’ operating at arm’s length, to manage some portion of reserves may have advantages.”
Asia’s foreign currency reserves totalled $2.28 trillion (Rs98 lakh crore) at the end of 2006.