Given the lack of considerable space both on the monetary and fiscal front to support economic growth, part of the country’s forex reserves can be used to support GDP numbers, says a Deutsche Bank report. According to the global financial services major, forex reserves could be used for funding growth-critical public infrastructure projects and the macro backdrop is also suitable for this. It said India’s reserves adequacy strength remains considerably stronger than what is prescribed and hence a case can be made in favour of using a small portion of these reserves for public investment, which in turn would help to support growth.
“If USD 15 billion worth of forex reserves were channelled toward public investment in infrastructure, this would reduce total reserves by only 3.5 per cent but would add about 0.6 per cent to GDP, which could help to support growth in the near term,” Deutsche Bank said in a research note.
The report further noted that even if this transfer were to be made, the reserves adequacy position would hardly change and would remain significantly above the comfort range as prescribed by the IMF. It said this arrangement “merits a serious debate at this juncture”, given the backdrop of low inflation, positive real rates, commitment towards fiscal consolidation and strong external position.
Moreover, traditional monetary and fiscal policy support measures are also constrained by medium-term sustainability considerations and thus the non-traditional ways of freeing up resources for supporting growth should be considered, noted the report.