India’s foreign exchange reserves have by all indications crossed $600 billion, central bank chief Shaktikanta Das said, a huge buffer that will help insulate Asia’s third-largest economy from global spillovers and volatile external flows.
Earlier this year, the country’s foreign-exchange reserves briefly surpassed Russia’s to become the world’s fourth-largest, as the Reserve Bank of India continued to hoard dollars to cushion the economy against any sudden outflows. The reserves are enough to cover around 15 months of imports and have been bolstered by rising inflows into the booming stock market and foreign direct investments.
“While these flows ease external financing constraints, they also impart volatility to financial markets and asset prices, while producing undesirable and unintended fluctuations in liquidity that can vitiate the monetary policy stance,” Das said after announcing the decision to keep interest rates unchanged.
These flows have necessitated intervention by the central bank in spot, forward and futures markets, Das said, as it tried to stabilize financial market and liquidity conditions so that monetary policy remains independent to “pursue national objectives.”
“The success of these efforts is reflected in the stability and orderliness in market conditions and in the exchange rate in spite of large global spillovers,” Das added. “In the process, strength is imparted to the country’s balance sheet by the accumulation of reserves.”
Das’s comments, according to analysts, imply that the RBI in trying to manage the so-called “Impossible Trinity” — of maintaining monetary policy independence, allowing a steady flow of foreign capital and keeping the currency stable — is choosing to pursue an independent interest rate policy for the local economy.
Also known as the “Trilemma,” the trinity can be a bane for emerging markets which face the risk of scaring off foreign capital and sending the currency tumbling should they cut interest rates too low. On the other hand, if they raise borrowing costs too fast to protect the currency, funds can rush in, sending the local unit higher, and in the process strangling exports and derailing growth.
His comments indicate that “amid conflicts of policy goals of the so-called Impossible Trinity, the RBI is choosing to side with the pursuit of goals of independent monetary policy and FX management, while being buffered for any consequent implication on foreign flows,” said Madhavi Arora, lead economist at Emkay Global Financial Serivces Ltd.
https://finance.yahoo.com/news/india-fx-reserves-help-manage-055202028.html
