Macro Economy

$354-billion forex reserves too small to fight a crisis: Basu

| | Updated on: Aug 26, 2015
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World Bank chief economist Kaushik Basu today said the $ 354 billion of forex war-chest is not sufficient to fight a crisis and advocated accumulation of more currency assets as the right strategy.

“In today’s world where China has US$ 4 trillion in foreign exchange reserves, US$ 354 billion is not enough in case an exchange rate-related issue breaks out,” Basu, who was the chief economic advisor to the finance ministry in the UPA government, said during a lecture at IIT Bombay.

The comments come within two days of Reserve Bank Governor Raghuram Rajan allaying market concerns, saying we have a strong forex reserves to fight any external stress arising from the present turmoil in the market following the crisis in the Chinese economy.

“I just want to indicate that we have plenty of reserves which was US$ 355 billion (at the last count), plus US$ 25 billion that exist because some of our forward sales. We have got US$ 380 billion to play with,” Rajan had said on Monday on a day when the market saw its worst fall tanking close to 6 per cent and the rupee hitting a 2-year low of 66.65 a dollar.

Basu, however, said we have not entered a phase of “competitive devaluation or a currency war where what you do is you lower your exchange rate to try and give a boost to your exports.”

There is, however, a risk of the same, he warned and said if the Chinese yuan falls further, other countries like Taiwan, Thailand and Vietnam which are dependent on exports may be impacted.

“I think as far as possible you must resist competitive devaluation,” Basu said.

“Overall on exchange rate policy, my suggestion will be roughly what used to be done till 2008, when we accumulated foreign exchange reserves,” he added.

Published on January 23, 2018

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