Over the recent past, India has witnessed a considerable rise in its foreign exchange reserves. There has been an excess of dollar inflows when compared to the outflows. The huge dollar reserves may allow India to move towards full convertibility as recommended by SS Tarapore committee. But India may have to weigh its own options as most of the Latin American countries had witnessed the same kind of situation in the past. What are the implications of full convertibility? What have been the causes for growth in the value of the Indian rupee? Read on.

India's forex reserves stands at $85bn, the highest ever, an increase of $23 bna little more than that of the previous year. In the last 40 years, this is the first time that rupee appreciated against major global currencies (except Euro). On a year over year basis, rupee has appreciated around 5% against dollar, 7.6% against yen and 3.7% against pound sterling. This appreciation of rupee has added significance to the surging reserves position.

IMF defines forex reserves as "external assets that are available to and controlled by monetary authorities for direct financing of external payments imbalances for indirectly regulating the magnitude of such imbalances through intervention in exchange markets to affect the currency exchange rate, and/or for other purposes". The RBI definition states that "forex reserves refers to both forex reserves in the form of gold assets in the banking department and foreign securities held by the issue department and domestic reserves in the form of bank reserves". Whatever be the definition, it is evident that it plays a crucial role in a country's economic policy decisions. Further as per the RBI Act, the minimum reserve system, the composition of reserves and the guidelines for deploying such reserves are spelt-out in the relevant sections.

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