15. A notable development affecting India’s balance of payments during the year was the sharp increase in prices of crude oil and petroleum products. In the last 16 months, crude oil prices increased by around 150 per cent from US $ 10-11 per barrel during January 1999 to about US $ 25 per barrel during most part of March 2000. Following the recent decision of OPEC to increase production, oil prices have declined to around US $ 20-21 per barrel in April 2000.

16. The impact on oil import bill, due to increase in the prices of oil, is estimated to be US $ 12 billion during the year 1999-2000. Fortunately, the increase in oil import bill was absorbed without an undue pressure in the overall current account deficit. The current account deficit is likely to be around 1.0 per cent of the GDP in 1999-2000, i.e., the same level as in the previous year. The relatively low current account deficit was made possible by a turnaround in exports, lower growth of non-oil imports and continued buoyancy in invisible receipts. After taking into account the recent changes in oil prices as well as changes in EXIM policy, the current account deficit in the year 2000-2001 is still expected to be well below 2 per cent of GDP.

17. Developments in respect of both the exchange rate of the rupee as well as movements in foreign exchange reserves were also satisfactory. At the end of March 2000, the foreign currency assets of the country were higher by US $5.54 billion compared with a year ago, and reached the highest level of US $ 35.06 billion. Foreign exchange reserves, including gold and SDRs, were also at their highest (US $ 38.04 billion), and showed an increase of US $ 5.55 billion during the course of the year. Net reserves, after taking into account forward liabilities, increased by US $ 5.67 billion over the year.

18. Following the East-Asian crisis and subsequent developments in certain other countries, an appropriate policy for management of foreign exchange reserves in emerging economies has figured prominently on the international agenda. India is a member of various international groups where discussions on the international financial architecture and related issues are currently in progress (e.g., the International Monetary and Financial Committee at the IMF, the Bank for International Settlements, the Group of 20, and Working Groups set up by the Financial Stability Forum, etc.). It is now widely agreed that in judging the adequacy of reserves in emerging economies, it is not enough to relate the size of reserves to the quantum of merchandise imports or the size of the current account deficit. In view of the importance of capital flows, and associated volatility of such flows, it has become increasingly important to take into account the composition of capital flows, particularly short-term external liabilities, in judging the adequacy or otherwise of foreign exchange reserves. An additional factor which has to be built into this assessment is the need to take into account certain contingencies, such as, unanticipated increase in commodity/asset prices.

19. The recent international experience, particularly during the period of the East Asian crisis, also highlighted the fact that the emerging economies have to largely rely on their own resources during external exigencies as there is no "lender of the last resort" to provide additional liquidity at short notice. While the International Monetary Fund and the World Bank did their best to arrange rescue packages and provided financial assistance to the affected economies, the agreement on conditionality packages necessarily took some time and their implementation posed further difficult challenges for the policy makers. The content, size and the speed with which these programmes could be approved also varied from country to country depending on the strength of political support by industrialised countries, which are the major shareholders of the international financial institutions.

20. The overall approach to the management of India’s foreign exchange reserves has reflected the changing composition of balance of payments, and has endeavoured to reflect the "liquidity risks" associated with different types of flows and other requirements. The policy for reserve management is thus judiciously built upon a host of identifiable factors and other contingencies. Such factors inter alia include: the size of the current account deficit; the size of short-term liabilities (including current repayment obligations on long-term loans);the possible variability in portfolio investments and other types of capital flows; the unanticipated pressures on the balance of payments arising out of external shocks (such as, the impact of the East Asian crisis in 1997-98 or increase in oil prices in 1999-2000); and movements in the repatriable foreign currency deposits of Non-Resident Indians. 21. The movements in India’s foreign exchange reserves in recent years has kept pace with our requirements on trade as well as capital account. The strength of the foreign exchange reserves has also been a positive factor in facilitating flow of portfolio investments by FIIs and in reducing the ‘risk’ premium on foreign borrowings and Global Depository Receipts (GDR)/American Depository Receipts (ADR) issued by Indian corporates. However, there can be no room for complacency. Unanticipated domestic or external developments, including undue volatility in asset prices in equity/bond markets, can create disproportionate pressures in the foreign exchange market in emerging economies. It is, therefore, essential to continue with the pursuit of realistic and credible exchange rate policies, in addition to vigorous implementation of domestic and external sector reforms to further strengthen the balance of payments position over the medium term. It is also necessary to ensure that, leaving aside short term variations in levels, the quantum of reserves in the long run is in line with the growth in the economy and the size of risk-adjusted capital flows. This will provide us with necessary security against unfavourable or unanticipated developments.

22. The day-to-day movements in exchange rates are market determined. The primary objective of the Reserve Bank in regard to the management of the exchange rate continues to be the maintenance of orderly conditions in the foreign exchange market, meeting temporary supply-demand gaps which may arise due to uncertainties or other reasons, and curbing destabilising and self-fulfilling speculative activities. To this end, as in the past, the Reserve Bank will continue to monitor closely the developments in the financial markets at home and abroad, and take such measures as it considers necessary from time to time. 23. Exports, particularly software exports (which technically form part of the invisible receipts in the balance of payments statistics) have done well during the year. In the interest of balance of payments viability, this momentum must be kept up. In the past 18 months, several measures were introduced to ensure timely delivery of credit to exporters and remove procedural hassles. These measures included provision of ‘On Line credit’ to exporters, extension of ‘Line of Credit’ for longer duration for exporters with good track record, peak/non-peak credit facilities to exporters, permission for interchangeability of pre-shipment and post-shipment credit and meeting the term loan requirements of exporters for expansion of capacity and modernisation of machinery and upgradation of technology. Improvements were also made in the procedure for handling of export documents and fast track clearance of export credit at specialised branches of banks. Similarly, new simplified guidelines were issued for sanction of credit facilities for software services, project services and software products and packages. 24. In order to ensure that the above procedural and other improvements in the credit delivery system are actually reaching the exporters, the Reserve Bank had also set up a Bankers’ Group at the operational level (comprising senior officials from commercial banks and the Reserve Bank). The Group has held a number of inter-active sessions with exporters as also base-level officials of the commercial banks at 21 major export centres in the country in addition to discussions with industry associations. So far, the feedback received from this exercise is highly positive. In order to further improve the credit delivery system, the Reserve Bank would now like to invite exporters, particularly those who are located in non-metropolitan centres, to send their reactions on whether the new systems are working satisfactorily. They may also send their suggestions for improvement in procedures, particularly those which are designed to reduce paper work without diluting accountability. Exporters’ responses can be sent directly to the RBI by post or by e-mail at exportsreview@rbi.org.in by end of June 2000. On the basis of responses received, the Bankers’ Group will be advised to formulate a programme of action to further improve the credit delivery system.

25. Over the past two years, the Reserve Bank has also introduced several new facilities for Non-resident Indians (NRIs). The overall objective is to make financial transactions in and out of India by NRIs as flexible and easy as possible, and to reduce the need for seeking individual or specific permission from the Reserve Bank. Thus, general permission has already been issued for opening of different types of bank accounts, transactions in shares, securities and debentures, and portfolio and direct investments, etc. As in the case of exporters, NRIs are also requested to send in their responses on whether the facilities and procedures are working satisfactorily. They may also send their further suggestions for improvement in these facilities. Their views/suggestions may also be sent by e-mail at nrireview@rbi.org.in by the end of June 2000. Further action to improve the facilities will be taken by the Reserve Bank, in consultation with the Government, wherever necessary.

26. Recently, the Government has substantially expanded the automatic route for Foreign Direct Investment (FDI). RBI has already granted general permission to the Indian companies to receive funds and issue shares to their foreign collaborators. No specific approval of Reserve Bank is required for such investments. The same benefit has also been extended to all cases of foreign investment approved by the Foreign Investment Promotion Board (FIPB). The above facilities are subject to filing a post-facto report by the recipient company with the Regional Offices of the RBI within 30 days of the issue of shares to foreign collaborators. All companies are requested to comply with this requirement.

27. In January, 2000 general permission was granted to Indian companies for issue of ADRs and GDRs without any value limits. Accordingly, Indian corporates can now freely utilise up to 50 per cent of such ADRs/GDRs for overseas investments subject only to post facto reporting to the Reserve Bank. In addition, companies in IT & entertainment software and certain other knowledge-based sectors have been granted further facilities for overseas acquisition without requiring prior permission of the Government or the Reserve Bank. These facilities provide for acquisitions allowed by issue of ADRs/GDRs on stock swap basis up to a value limit of 10 times the export earnings of the Indian company in the previous year, or up to U.S. $ 100 million (without reference to the level of actual exports). It is also open to Indian companies to apply to the Reserve Bank for approval of any overseas investment or acquisition proposals which do not fall within the above parameters. It is hoped that these facilities would provide sufficient scope for expansion of internationally competitive Indian enterprises at the global level.