RBI cautions against complacency on forex reserves front

Though the country’s foreign exchange reserves are at an all-time high of close to $330 billion, Reserve Bank of India Deputy Governor HR Khan cautioned against complacency as no amount of reserves would be enough for fighting extreme volatility in the currency markets.

“Foreign currency reserves have improved … But there is also a view that no amount of foreign exchange reserves can (be a) cushion when there is extreme volatility or external shocks,” Khan said at a CII summit.

While the macroeconomic vulnerabilities facing the country have significantly receded due to high growth, contained current account deficit, lower inflation and high forex reserves, the Deputy Governor observed that this should not make us complacent.

“If another round of quantitative easing happens, we would be the last possibly to be affected...

“But we can’t afford to be complacent and we should be prepared to face vulnerabilities,” Khan said.

RBI Governor Raghuram Rajan, in a media interaction last week had observed that India will not be immune from volatility (in the global currency markets).

“I think everybody is affected by volatility, but after the first wave of volatility when market participants stop to think, I am hopeful that we will look much better than, perhaps, comparative countries,” said Rajan.

Last year, the RBI extended special forex swap facilities at concessional rate for fresh longer term FCNR(B) deposits and banks’ overseas borrowings along with enhancement in their overseas borrowing limits. This led to forex inflows in excess of $34 billion that aided in restoring stability of the rupee.

The Reserve Bank undertook the concessional swap facility as an exceptional measure to bolster forex reserves for strengthening its market intervention capability.

Referring to unhedged foreign currency exposures, Khan said they are a threat not only to individual companies but also to the financial system and systemic stability. “We will certainly not like to micro-manage what is otherwise a commercial decision,” he added.

The Deputy Governor said one of the challenges that corporates might face going ahead will be in terms of raising resources -- not in terms of non-availability of resources, but of how debtors expect commitments.

It is very likely that credit institutions could face enhanced scrutiny by depositors, taxpayers, analysts and shareholders, he said.