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India is least vulnerable to US dollar fall
November, 23rd 2009

India is in a better position to stave off the effects of a steep depreciation of the US dollar when compared to its BRIC (Brazil, Russia, China and India) peers, having least exposure to the US sovereign bonds as a percentage of its total reserves.

As of September 2009, India had just 12.81 per cent of its foreign exchange (forex) reserves in US treasury bonds, according to data released recently by the US Department of Treasury.

This is significantly lower than its May 2009 exposure level of 14.79 per cent.

Comparatively, Brazil had an exposure of 64.63 per cent of their forex reserves to US bonds as of September 2009, while Russia had 29.46 per cent and China 35.15 per cent. Even in absolute terms, Indian investments in US treasury bonds were less than one-third of all the other BRICs peers.

"Less exposure to US treasury bonds means that India is least vulnerable to US dollar depreciation in comparison to its BRIC peers," said Jagannadham Thunuguntla, head of equities of SMC Capitals.

"The reduction in forex exposure to US bonds by nearly two per cent between May and September 2009 could be attributed to India's intention to rechannelise its forex resources into non- dollar assets," Thunuguntla added.

The recent acquisition of 200 tonnes of gold by India from the International Monetary Fund (IMF) is also strengthening this view. With Asia expected to emerge as the world's economic growth engine, the dollar is expected to further lose its dominance as the reserve currency in the decades to come.

"The dollar for quite some time will be an important reserve currency. Over time, central banks should start to look at a mix of euro, yen, renminbi and possibly the Indian rupee. That is only to be expected with the center of economic activity shifting from the West to the East," said Rajat Nag, managing director of Asian Development Bank (ADB), recently.

In the wake of the global financial crisis arising from the US sub-prime crisis, the US slipped into recession about 14 months back, and is facing a huge fiscal deficit. Economists fear the US dollar, which has been the reigning reserve currency for over the last few decades, is expected to weaken steeply before the US economy recovers.

Many economists have already predicted that the US dollar will lose its status as the reserve currency within a decade or two. About 64 per cent of the global sovereign reserves are in US dollars, against about 27 per cent in euro, the currency of the European Union. The greenback (US dollar) dropped to a 15- month low against a basket of six major currencies this week.

Further weakening of the US dollar is expected to hurt countries like China, which had nearly $800 billion of forex assets in US bonds by September 2009. This is compared to Brazil's $145 billion, Russia's $ 122 billion and India's $35 billion.

"Hence, any eventual crisis in the US economy can leave more severe scars on the economies of China, Japan, Brazil and Russia than that of India," said Thunuguntla. This, in fact, is forcing China to lobby in the international circles to find an alternative to dollar as the reserve currency of the world.

As on November 13, 2009, India had total forex reserves of $ 286 billion, of which foreign currency reserves and gold constituted $263 billion and $17.5 billion, respectively.

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