Indian Foreign Currency Reserves Will Help Global Fallout From Tide, RBI Says
By all indications, India’s foreign exchange reserves have exceeded $ 600 billion, said central bank chief Shaktikanta Das, a huge buffer that will help protect Asia’s third-largest economy from global fallout and volatile external flows.
Earlier this year, the country’s foreign exchange reserves briefly overtaken that of Russia to become the fourth The Reserve Bank of India continued to accumulate dollars to protect the economy against any sudden outflow. Reserves are sufficient to cover around fifteen months of imports and have been bolstered by increasing inflows into the booming stock market and foreign direct investment.
“While these flows ease external financing constraints, they also impart volatility to financial markets and asset prices, while producing unwanted and unintentional liquidity fluctuations that can vitiate the stance of monetary policy,” Das said after announcing the decision to keep interest rates unchanged.
These flows required central bank intervention in spot, futures and futures markets, Das said, as she tried to stabilize financial market and liquidity conditions so that monetary policy remained independent for “pursue national objectives”.
Read: “Impossible Trinity” pushing Indian RBI towards stronger rupee
“The success of these efforts is reflected in the stability and order in market conditions and in the exchange rate despite significant global spillovers, ”Das added. “In the process, strength is imparted to the country’s balance sheet through the accumulation of reserves. “
Das’ comments, analysts say, imply that the RBI, in trying to manage the so-called “Impossible Trinity” – to maintain the independence of monetary policy, to allow a constant flow of foreign capital and to maintain the currency stable – chooses to pursue an independent interest rate policy for the local economy.
Also known as the “Trilemma,” the Trinity can be a bane to emerging markets that risk scaring foreign capital and causing the currency to fall if they cut interest rates too low. On the other hand, if they raise borrowing costs too quickly to protect the currency, funds can flow in, pushing local unity higher and in so doing strangle exports and derail growth.
His comments indicate that “amid the conflicting political goals of the so-called Impossible Trinity, the RBI chooses to side with the pursuit of independent monetary policy and foreign exchange management goals, while being buffered for any consequent implication on foreign flows, “said Madhavi Arora, chief economist at Emkay Global Financial Services Ltd.
(updates with economist commentary after fifth paragraph)