Money & Banking

India’s forex reserves are ‘not built out of export surplus’: RBI Deputy Governor

Our Bureau Mumbai | Updated on August 26, 2019

Era of accommodative monetary policy regime round the corner: BP Kanungo

India’s foreign exchange reserves are borrowed reserves and not built out of export surplus, according to Reserve Bank of India Deputy Governor BP Kanungo.

“Inasmuch as it (forex reserves) provides a bulwark against sudden flow reversals, it enhances the country’s ability to cope with the fallout and, indeed, contributes to global stability as well,” he said in a speech delivered at the Forex Association of India Conference in Singapore earlier this month.

India’s forex reserves stood at $430.50 billion in the week ended August 16. Though long-term flows related to foreign direct investment (FDI) and long-term debt have been fairly stable, keeping in tandem with the economic fundamentals, Kanungo assessed that portfolio flows have their own dynamics depending as much on attractiveness of returns of Indian assets as the global factors determining their risk appetite.

“Gyrations in the forex market in these circumstances leave no option other than market intervention to restore orderliness in the market,” he added.

Global economy

Kanungo said the global economic scenario is not very encouraging, though there is no room for pessimism yet.

He observed that growth in developed countries remains sluggish and emerging economies, including China and India, the dominant contributors to global growth in recent years, appear to be facing challenges. The Deputy Governor said another era of accommodative monetary policy regime seems to be round the corner, as evident from the synchronised rate cut by several central banks. The IMF continues to revise the global growth projections for 2019 downward, though the outlook for 2020 is more positive, he added.

As per the IMF’s July 2019 World Economic Outlook (WEO), global growth is forecast at 3.2 per cent in 2019, picking up to 3.5 per cent in 2020 (0.1 percentage point lower than in the April WEO projections for both years).

Export and import

Kanungo underscored that while every country favours exports (except when the terms of trades are deteriorating) because it contributes to domestic employment and growth, there is an abhorrence for imports because the country loses employment, growth, and foreign exchange.

“This brings in deterrent measures like tariff and when one hears talk about optimum tariff, it simply means optimum for the welfare of the country concerned, not for global welfare as a whole. And if all the trading countries impose retaliatory tariffs, it becomes a negative-sum game affecting global welfare and welfare of individual nations to a varied extent,” he expounded.

While the national governments and policymakers are supposed to act in the interest of their respective constituencies, the Deputy Governor said the collateral effect of their action on the rest of the world can be significant.

“The need for coordinated action among the leaders of the larger nations is urgent. It must be borne in mind that such coordinated action did contribute to contain the global financial crisis,” he added.

Published on August 26, 2019

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