The Hindu Business Line : Increased capital investment flows boost forex kitty

THE major contributor to the $36.8-billion jump in the forex reserves of the country in 2003-04 has been the almost two-fold increase in capital account flows.

According to the latest data released by the Reserve Bank of India, there has been a significant rise in net inflows through the capital account heads at $22.7 billion against $12.8 billion in 2002-03.

Capital account heads include: Foreign investment, which increased by $14.5 billion ($4.6 billion), short-term credit $1.6 billion ($1 billion), external assistance $-2.7 billion ($-2.5 billion), external commercial borrowings $-1.9 billion ($-2.3 billion), other items $5 billion ($3.6 billion) while banking capital decreased to $6.2 billion ($8.4 billion).

The reserves as a whole surged by $36.8 billion in 2004 fiscal compared to $21.3 billion in the previous fiscal.

Major sources of accretion to foreign exchange reserves during the year have been foreign investment (39.4 per cent); comprising FDI (8.5 per cent) and portfolio investment (30.8 per cent), non-resident deposits (9.8 per cent) and short-term credit (4.4 per cent), said a press note from the central bank.

The valuation gain in reserves was to the extent of $5.4 billion up from $4.4 billion in the previous year. Valuation changes, reflects the appreciation of the euro, pound and yen against the dollar and accounted for the $5.4-billion of accretion to total reserves.

While the apex bank denominates its forex reserves in terms of dollars, these comprise a basket of major international currencies, particularly dollar, euro and pound.

Therefore, when the non-dollar currencies appreciate vis-à-vis the dollar, there is an accretion to reserves by way of valuation gains.