It's all about rate of return.Nothing more nothing less.Currently India's Forex reserve which is nothing but a large amount of dollars isn't sitting idly in RBI's vaults.It's held in US treasury bonds.So for argument sake we 100 billion dollars of 10 year treasury bond with yield roughly around 4.7%.Now US govt reports that Inflation rate (ie rate of depreciation of currency ) is 3% annualized.But I live in US and it's pretty obvious that offcial inflation rate is far off the mark.The real inflation rate is close to 5% which is greater than 10 year yield of 4.75.So By holding that India is basically losing it's wealth.It's as simple as that.
Infact any other option that gives it a rate of return over 4.75% would be a return that's worth espousing.The catch is that 4.75 is theoretically risk free as we don't expect US treasury to default.But infrastructure projects certinly can give you a return well in the north of 5%.They have intangible return too as they aid economic development , not only the cash returns from such project.Also with the current pace of M3 growth Forex reserve in dollars will lose it's real value even more.So it's just a no brainer.I wonder why anyone would frown upon such an obvious idea.
