The market buzz is after all correct! India's foreign exchange reserves have crossed the magical $100 billion mark. India joins other Asian nations like China, Taiwan, Hong Kong, Japan and South Korea to achieve this feat.

Finance Minister Jaswant Singh on Saturday after a conversation with Reserve Bank of India Governor Y V Reddy confirmed that the country's forex reserves comprising foreign currency assets, gold and special drawing rights touched $100.048 billion on December 19.

Forex reserves crossed $98.9 on Dec 12

The rising forex reserves were mainly due to strong foreign institutional investments and euro registering substantial gains against the US dollar.

Forex reserves to fuel growth: FM

Finance Minister Jaswant Singh said India's record forex reserves will add greater momentum to the reforms to attain significantly higher growth.

"Our reserves will add greater momentum to bolder economic reforms, enabling the country to achieve significantly higher growth. This will also provide a cushion facilitating higher level of investment activity," he said.

"This level of forex reserves reinforces my conviction that our aim of self-reliance for which we have worked for several decades since independence, has now comfortably been reached at this point of great confidence," he said, adding, "The nation is on a much higher growth path."

This "historic high" has been achieved despite prepayment of $5.0 billion of external debt this calendar year, $5.5 billion outflow for redemption of Resurgent India Bonds and a contribution of $498 million to the International Monetary Fund, Singh asserted.

Singh said the forex reserves had increased by about $94 billion since 1991, while the external debt had gone up by only $20 billion.

Singh said RBI has assured that the forex reserves would continue to be used to contain volatility, provide comfort to launch policy measures for accelerated growth and to withstand any possible supply shock.

He was appreciative of RBI for prudent management of exchange rate, interest rate, liquidity conditions and forex reserves.

"These policies, I am assured by the RBI, will continue to be followed keeping in view the overriding macro objective of growth, price stability and financial stability," he said.

"This level of forex reserves reinforces my conviction that our aim of self-reliance for which we have worked for several decades since independence, has now comfortably been reached at this point of great confidence," Singh said, adding, "The nation is on a much higher growth path."

"The nation's forex reserves contribute very significantly to our national security, apart from providing a much greater degree of national autonomy to the conduct of public policy," the minister said.

The reserves would, in addition, enable Indian companies and financial intermediaries to access needed foreign currency resources for their domestic and global activities at finer and more favourable terms than ever before, Sigh added.

Cautious approach to full convertibility

Finance Secretary D C Gupta said the government will adopt a cautious approach while moving towards full capital account convertibility despite the country having adequate reserves.

Gupta said the government would continue with its policy to prepay costly foreign debt.

India is also supportive of proposal for creating an Asia Bond Fund and the discussions were on with Asian nations, he said.

Regarding the sizeable inflow of foreign institutional investors, Gupta said, "They are non-debt creating capital inflows besides, the short term flows were negligible compared to the size of forex reserves."

S&P, IMF lauds forex management

Standard & Poor's on December 16 revised the outlook on India's 'BB' long-term foreign currency rating from negative to stable, reflecting the improving external finances.

"Rapidly increasing external liquidity, sustained by growing foreign exchange reserves (exceeding 700 per cent of short-term debt), and modest debt service payments sparked the revision in the foreign currency outlook," a S&P release said, quoting credit analyst Takahira Ogawa, director in the Asia-Pacific Sovereign Ratings Group.

Foreign exchange reserves should equal about 490 per cent of India's gross external financing gap (current account deficit plus amortisation and short-term debt) in 2003 compared with 90 per cent or so in similarly rated countries.

This is a major supporting factor for the sovereign ratings on India apart from its stable and good economic prospect, which was another factor supporting the sovereign ratings, he added.

Earlier in the year International Monetary Fund said India's management of foreign exchange reserves has "generally been in accordance with IMF guidelines and comparable to global best practices".

In line with global developments, in the recent period, the country's reserve management operations have become more transparent, IMF said.   

The emphasis is on efficient management of reserves and India's policies like efficient use of technology, sound management of market risks, sophisticated risk management techniques and determination of optimal currency composition are comparable with international best practices, it said.

Inflows of over $24 billion

The forex reserves witnessed total inflows of over $24 billion since March 28, 2003.

The reasons, according to the market sources, had been steady inflows through exporters and private remittances, improved foreign direct investment and rising prices of the yellow metal.

Net investments by foreign funds have been pegged at about $7.1 billion, the highest yearly investment since the domestic markets were opened to foreign funds a decade ago.