 |
|
Deepak Shenoy, CEO of Capitalmind, a prominent financial firm, has issued a strong critique of the Reserve Bank of India's (RBI) management of India's foreign exchange reserves and its impact on the Indian Rupee (INR). Shenoy contends that the RBI's intervention in the forex market is artificially suppressing the rupee's value, preventing it from reaching its true potential. He argues that a free market approach, without significant RBI intervention, would allow the rupee to appreciate significantly, potentially by 15-20% within the next two years. This appreciation, he believes, is justified by India's robust economic growth and its increasing attractiveness to global investors. The influx of foreign investment would naturally increase demand for the rupee, driving up its value against the US dollar.
Shenoy's analysis hinges on the current dynamics of the foreign exchange market. He explains that the RBI's control over the majority of India's dollar holdings creates an imbalance. When individuals or businesses require dollars, they are forced to rely on the central bank, which effectively dictates the exchange rate. This centralized control, he argues, prevents a truly competitive market from emerging. He advocates for a system where banks and other market participants can hold significantly larger dollar reserves, allowing them to meet the demand for dollars without the RBI's intervention. This increased market participation, Shenoy believes, would lead to a more stable and naturally fluctuating exchange rate, reflecting market forces more accurately. The current situation, where the RBI's actions heavily influence the rupee's value, creates instability and prevents the rupee from reflecting India's economic strengths.
A key point of contention for Shenoy is the size of India's foreign exchange reserves, which stood at $634.585 billion in January 2025. He argues that these reserves are excessively large, far exceeding the nation's needs. He estimates that India possesses enough reserves to cover five to ten years of current account deficits. Maintaining such a high level of reserves, he suggests, is not only unnecessary but also counterproductive. The RBI's accumulation of these reserves, according to Shenoy, has contributed to the rupee's depreciation by preventing its appreciation in response to market forces. Instead of accumulating reserves, Shenoy suggests that the RBI should be actively selling dollars to stabilize and appreciate the rupee's value. He points to previous instances where the RBI sold dollars during similar periods of capital outflow, which resulted in greater rupee stability. This current strategy, in his opinion, is a deviation from past successful practices.
Shenoy proposes an innovative approach to managing foreign exchange reserves by leveraging the power of domestic investment. He suggests that the RBI should significantly increase the limits for Indian mutual funds to invest in foreign stocks. Currently, these limits are relatively low, restricting the amount of capital that can flow out of India. By increasing these limits, say, from $8 billion to $100 billion, India could not only build its reserves indirectly but also allow its citizens to participate in global investment opportunities. This approach, he argues, would diversify India's reserves, reducing dependence on the central bank's holdings, and fostering more robust participation in global capital markets. Importantly, he suggests that in a crisis, the government could use regulatory mechanisms to bring this money back. This money would be owned and controlled by the domestic investors rather than the central bank.
Finally, Shenoy addresses the question of whether these substantial reserves are genuinely useful in times of crisis. He questions the traditional view that large dollar reserves offer protection. He points to Russia's experience as an example, demonstrating that even substantial reserves can be rendered ineffective in the face of geopolitical sanctions. He argues that relying on large dollar reserves as a primary safeguard is a flawed strategy. A more effective approach, he suggests, would involve diversifying risk and strengthening the resilience of the domestic economy, rather than solely relying on large holdings of foreign currency. This requires a more nuanced understanding of the vulnerabilities faced by a nation and a move away from traditional mechanisms of forex management. He believes India's strategy of accumulating massive forex reserves, while appearing protective, is actually hindering the rupee's stability and the economy's overall performance.