Apart from international shocks, Mr Reddy said the country is also grappling with fluctuations in foodgrain production, which is having its implications on the economic situation.  

“In India, we do not have any natural commodities like (petro products) for exports which can give good earnings in exports. Also, the country has seen current account deficit consistently,” he said while addressing the silver jubilee celebrations of Foreign Exchange Dealers Association of India (Fedai) here.

Swelling FE reserves
He also felt that India was also not in a position to set up a sovereign investment fund because a build-up in foreign exchange reserves reflected capital flows and was needed as protection against possible shocks on the capital account and a fund reversal. The need for establishing stabilisation fund as well as sovereign wealth fund (SWF), according to RBI governor, is to be assessed in backdrop of the current fiscal and financial conditions in the country. “Even if the country decides in future on establishing stabilisation or wealth fund, there has to be stringent disclosure and accounting standards for them as they are accountable to the public.”

There were also suggestions that India should set up a stabilisation fund on the lines of a sovereign wealth fund, but Mr Reddy pointed out that the record foreign exchange reserves reflected management of capital inflows, and not an increase in national wealth.  

Possible shocks
In this context, he said: “At times, it is argued in the context of significant growth in forex reserves in recent years, that a portion of the reserves which is in excess of a certain recommended level can be invested separately for maximising returns.”

However, he added, “one should view the so-called excess reserves from the perspective of possible shocks to the current account and the nature of capital flows.” 

India’s foreign exchange reserves touched a record $247.8 billion on September 28, up nearly $12 billion from the week earlier, and were fifth-largest holdings in Asia.

 It may be noted that stabilisation funds are established from windfall gains resulting from commodity exports and it could be used in smoothening fiscal conditions, while SWFs are established from excess foreign exchange reserves that are then invested globally in high yielding instruments, hedge funds and private equity.