Warrier's Collage December 6, 2020

Welcome to Warrier's Daily COLLAGE December 6, 2020 Sunday Special Edition 🙏 M G Warrier Quote for the day: "Whatever you can do or dream you can, begin it. Boldness has genius, power and magic in it.” -Goethe Restoring TRUST in Governance : India's 2020's Challenge https://www.amazon.in/dp/B08NT36GB2/ref=cm_sw_r_em_apa_hBmYFb7PBYR0M Best Sellers Rank* #7,002 in Books (See Top 100 in Books) #8 in Banks & Banking (Books) #11 in Banking #13 in Money & Monetary Policy *Position on December 5, 2020. Thanks. A Interaction 1) Dr M L Jayaraman Nayar Thiruvananthapuram The Picasso of Appan Nagar "Nice to read Shri. Babusenan's real time net story which has real time gross values. A great tribute to be called Picasso. That Diwali gift is worth a thousand Diyas." 2) E T Rajendran Cheñnai Reference to the Collage issue of December 4. It is true that the foreign exchange reserves of our country have increased considerably over the years, the main sources being export proceeds, foreign investments (direct and portfolio), remittances, external commercial borrowings, etc. All these come through banking channels. As part of the Reserve Bank’s exchange rate management system, it acquires foreign exchange and thus accumulated to the current level of reserves ($ 575 billion). The Bank/Government do not seem to have any targeted level of accumulating foreign exchange reserves. When RBI buy the foreign exchange from the authorised dealers, rupee equivalent is passed on to the banks, which is a source of liquidity to them, and they use this for their lending activities, including for infrastructure financing. For the deployment of foreign exchange reserves, RBI is guided by the provisions contained in RBI Act. Essentially, foreign exchange reserves can be deployed in Foreign Government securities, deposits with foreign central banks, deposits with Bank for International Settlements, deposits with commercial banks abroad, gold etc. Any deployment other than that provided in the Act is thus not allowed. As rightly suggested by Subbaraman Sir, why not we use the reserves for our own developmental activities? It was with this end in view, the Government, in consultation with RBI, set up the India Infrastructure Finance Company Ltd (IIFCL) (Incorporated in UK in 2007-08) and authorised RBI to subscribe to the foreign currency bonds issued by IIFCL, from out of foreign exchange reserves up to $ 5 billion, for financing multi-sector infrastructure projects in India. Of course, compared to the need for infrastructure financing, the amount subscribed so far may not be significant. The outstanding amount subscribed as on a recent date is around $ 1.9 billion. There is thus a limitation to financing of development/infrastructure projects from out of foreign exchange reserves. Moreover, any utilisation of reserves for domestic purpose will not qualify to be part of foreign exchange reserves. Further, although there is no clear cut yardstick for reckoning adequacy of reserves for a country like ours, norms such as import cover(presently about 11/12 months of imports), external debt of the country(about $ 559 billion as at the end of March 2020) short term external debt (about 23% of reserves) short term debt/volatile inflows (about 83% of reserves as on a recent date) etc are to be considered. This is more pertinent considering the lessons learnt by our country in 1991, when we had to borrow abroad by pledging gold, and the Asian financial crisis of 1997. By these reckoning, our country seems to be in a comfortable situation now, given the level of reserves. Yet another advantage of having a comfortable level of reserves is in the rating the international credit rating agencies accord, on which is dependent a number of variables like country rating, borrowing rate for external commercial borrowings, etc. Besides the above, foreign currency assets like foreign securities, Central Bank/BIS deposits in addition to gold and Central Government securities are eligible assets as a backing for Notes issue by RBI, reiterating the need for a comfortable level of reserves. Share of gold in foreign exchange reserves of our country, at about 6.4%, has not significantly increased over the years, although there is an increase in physical quantity. Looking back, more of investment in gold in recent years would have fetched enhanced return (by way of capital gain) considering the the current spurt in gold price. On the issue of monetising gold held with the public, my feeling is that this came to the fore many times in the past, including by way of issuance of the famous gold order of 1968, but in vain. Apparent reason is the human psyche. Gold ornaments are bought and held by the population, especially female population, for adornment purpose, which will not be served by surrendering it for money or converting into gold deposit. Moreover, we cannot expect small holders to come forward and monetise their old. The gold deposit scheme introduced by the Government in late 1990s also did not meet with success; the very little subscription came from a few temple trusts. Such temple trusts are ideal targets for gold deposit as they should not have any qualm in surrendering the gold for converting into gold deposit, Gold, as an investment class, is a good asset -see the current spurt in price - but realisation always comes late. The much publicised Gold ETF and Sovereign Gold Bonds, which are investments in non-physical gold, do not seem to have attracted many investors, despite many advantages of holding such instruments. It may be interesting to note here that the initiative for introduction of Gold ETF came from RBI during 2005-06. Any investor, with a long term investment horizon, should have gold as an asset diversification strategy. Parents of marriageable daughters could think of gifting to their daughters, at least half of the gold which they propose to gift, in gold instruments such as Gold ETF and Sovereign Gold bonds, instead of heavy load of ornaments, which, immediately after marriage, will find their place in bank lockers.

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