Commodity Online
NEW DELHI: How can India’s large foreign exchange reserves come to its rescue as it tries to grapple with the crisis created by global economic slowdown?

According to Confederation of Indian Industry (CII), the government can set up an exclusive fund dipping into the large forex reserves Reserve Bank of India holds. This exclusive fund should be used for investing in Indian securities. The suggestion is part of the five point agenda of CII for insulating the Indian economy from the crisis.

“This will have the benefit of creating a floor for asset prices and preventing further depreciation in the rupee. This fund will ultimately make a profit as Indian asset prices are likely to increase in the longer term. The size of the fund should be at least US$ 7-8 billion,” CII said in a statement.

The CII Director General, Mr Chandrajit Banerjee said "CII was agreed with the Finance Minister in terms of the outlook towards the Indian Economy, and believes that the economy had strong fundamentals, however, some pro active actions are required to keep the momentum positive, and these would involve deeper cuts in CRR and the repo rates in order to inject liquidity into the system, creating a fund for supporting the capital markets; raising the interest rates on NRI deposits and easing of the ECB norms" .

CII said that inflation is coming under control. The Government measures have been appropriate in containing the inflation. However, the weakening of the Exchange Rate is a major concern. A steadier exchange rate and strengthening of the rupee at this point would be helpful.

The other major features of the 5-point agenda are:

First, a further cut in CRR by 50 basis points to inject a total of Rs 100,000 crore of liquidity into the system as against RBI’s estimation of Rs 60,000 now. CRR cuts should be accompanied by other measures such as immediate unwinding of MSS bonds held by RBI.

Second, the inflation trend is downward and therefore, it is time that the RBI also starts considering an interest rate cut, CII has suggested to the Central Bank. A cut in the repo rates by 50 bps would be very effective at this stage.

Thirdly, raise the interest rate on NRI deposits and if required the government/ RBI could plan something similar to the India Millennium Deposits or the Resurgent India Bonds. These were special deposits for non-resident Indians with returns higher than that available elsewhere. This would also enhance the dollar inflow and help check the slide of the Rupee, the CII release said.

Fifth, the other key initiative that needs to be taken with urgency is that of easing up the ECB caps. CII has said that while the recent relaxations of ECB guidelines for companies in the infrastructure sector (including the inclusion of the mining, exploration and refining sectors under infrastructure) are welcome, the government must allow all companies that are investing in new capacities to access foreign debt. This will allow some large projects to get funded at slightly better terms than the current cost in India as the Indian cost of funds is turning many projects unviable. CII's suggestions in this context include:

All projects with cost in excess of $ 500 Million should be allowed to borrow up to $150 Million for meeting Rupee capital expenditure;

Import of Services upto $100 million in a year should be allowed using ECBs. Services would include those related to R&D, new product development, license fees, technology fees, etc.

The maximum spreads currently allowed do not match up to the market rate at which loans are available. The RBI should take into account the recent hardening of LIBOR and increase the spreads accordingly.

The CII release went on to say that while the rest of the world affected by the crisis has paid the penalty of reactive policies, it is imperative that the policy makers in India take a pro active position on these issues and ensure that India remains an island of stability even as the financial meltdown unfolds in the world outside.