Can the problem of excess reserves be solved?
The problem of excess forex reserves is similar to the problem of excess food stocks faced by India in the past. If you sell the product whose large stocks you happen to hold, the market price of the product would decline. Food stocks are not sold in the open market even though they are way beyond the countrys needs, because their off-loading will bring down the price of food grains. Dollars are not sold in the rupee-dollar market because off-loading dollars would bring down the price of dollars and make the rupee stronger. In both cases since we try to choose how prices would move, we are in a quagmire. We are stuck with the consequences of past mistakes. In both cases the government is trying to think of ways out of the mess. How can forex reserves be used? Recently Montek Singh Ahluwalia, Deputy Chairman, Planning Commission, proposed that the reserves be used for infrastructure projects, for social sector lending, for non-bankable projects. The basic message behind this proposal is
