Essay About Exchange Rate Management And Excess Of The Reserve Money

Capital Account
CHAPTER 4
CONCOMITANTS FOR A MOVE TO FULLER CAPITAL ACCOUNT
CONVERTIBILITY
4.1 This Chapter reviews some key macro-economic indicators since 1996-97
and against this backdrop, certain steps are set out to enable a move to FCAC.
Policies for macroeconomic stability in an open economy environment need
greater attention. The fiscal-monetary policies, exchange rate management,
prudential, regulatory and supervisory safeguards and measures for development
of financial markets all assume importance (some of these issues are discussed in
subsequent Chapters). The implementation of these measures and the pace of
liberalisation are a simultaneous process.
Macroeconomic Indicators
4.2 Table 4.1 sets out select macroeconomic indicators comparing the position
as of 1996-97 and 2005-06. The real sector, monetary and external sectors show
improvement while the fisc continues to be of concern. The level of foreign
exchange reserves is at an all time high and the net foreign exchange assets (NFA)
are well in excess of the reserve money (RM) and are equivalent to one fourth of
the money supply. Unlike some countries, which have accumulated their foreign
exchange reserves through current account surpluses, the build up of the Indian
forex reserves has largely been the result of capital inflows. (Table 4.2)22
Table 4.1: Select Macroeconomic Indicators
1996-97 2005-06
I. Real Sector
Real Growth Rate (percentage) during the year 7.8
7.5 (Three year average ended
1996-97)
8.1 (Three year average
ended 2005-06)
Rate of Growth of Industrial Production
(percentage)
6.1 8.1
II. Monetary Sector
Inflation Rate (measured in terms of WPI)
Year on year
9.0 (Three