Two quarters of back-to-back sub-6% growth, a reflection of demonetization andGST-led "temporary disruption" in the economy, have raised worries regarding thelikely shape and speed of recovery in the coming quarters, even as stock marketscontinue to soar to new highs driven by a supportive flow dynamic. Indeed, thedivergence is quite stark.
We show through different metrics (import cover, expanded version ofGreenspan-Guidotti rule, IMF composite metric) that India’s reserves adequacystrength remains considerably stronger than what is prescribed and hence acase can be made in favour of using a small portion of these reserves for publicinvestment, which in turn would help to support growth. If USD15bn worth of FXreserves were channeled toward public investment in infrastructure, we estimatethis would reduce total reserves by only 3.5% but would add about 0.6% to GDP(INR960bn at the current exchange rate), which could help to support growth inthe near term. The reserves adequacy position hardly changes even if this transferwere to be made, and would remain significantly above the comfort range asprescribed by the IMF.
Given the lack of considerable space both on the monetary and fiscal front tosupport growth, there is some merit, in our view, to consider non-traditionalways of freeing up resources for supporting growth. One possibility is to FXreserves for funding growth-critical public infrastructure projects. This idea hasbeen discussed in the past but not implemented due to concerns on inflation,fiscal and fear of sudden stops in capital flows. But currently the macro backdropis significantly different which could merit a favorable decision.
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