Forex Hoard More Than Currency In Circulation

The ratio of net foreign exchange assets of the Reserve Bank of India (RBI) to total currency in circulation in the economy is at a staggering 105 per cent now.

In plain terms, it means the apex bank is in a position to redeem every single unit of domestic currency note which is in circulation in the economy by an equivalent amount of foreign exchange.

While the redemption is notional, the extent of cover available for the total currency in circulation has therefore put the RBI in a position to actually carry out the promise signed by the RBI governor on every currency note saying "I promise to pay the bearer the sum of...".

 

As per the latest RBI annual report, the happy situation has arisen because of the sustained accretion to forex reserves especially in the past few years.

The ratio of net foreign exchange assets to currency in circulation has increased from 14.4 per cent on March 31, 1991, to 105.2 per cent on March 31, 2002. In absolute terms, the total currency in circulation was Rs 2,50,974 crore compared with Rs 2,63,969 crore of net forex assets of RBI as on end March, 2002.

The growth of money supply in the economy has been far more gradual compared with the rise in forex reserves, which has been more dramatic.

In the same period the ratio of net forex reserves of RBI compared with the total broad money or M3 has also increased from 3 per cent to 17.6 per cent.

The over hundred per cent forex cover to the currency in circulation is incidentally somewhat different from the approach of most other central banks, which cover their currency only partially.

But the RBI approach influenced by the events of 1991 and the east Asian crisis is more conservative. In its annual report the bank says the quantum of forex reserves in the long run should be in line with the growth of the economy and the size of risk adjusted capital flows.