Contradicting the International Monetary Fund, which does not want India and other countries to use any of its foreign exchange reserves for building infrastructure, the World Bank has urged developing countries to consider diverting surplus foreign exchange reserves to productive domestic investment, including infrastructure.
India is one of the countries to which this advice will apply if the IMF's advice is rejected and the Bank's advice is followed. The World Bank makes its recommendation in its latest "Global Development Finance."
It suggests that an "adequate level" of foreign exchange reserves is enough to finance three to six months of exports and imports and reserves equal to short-term debt, namely debt maturing in one year or less.
India's foreign exchange reserves in 2004 equalled 16 months of imports while the ratio of reserves to short-term debt was 6.3.
The Bank lists advantages and disadvantages of accumulating foreign exchange reserves but, finally, gives this advice: "Developing countries that are accumulating reserves in excess of (i) prudential demand for liquidity and (ii) amounts needed to protect against volatility in capital flows will have to address the growing quasi-fiscal carrying costs, potential capital losses from further weakening of the dollar, and opportunity costs associated with directing capital inflows away from productive domestic investment, including infrastructure and into foreign asset accumulation."