Mumbai: Reserve Bank Governor Raghuram Rajan has said unless foreign exchange reserves rise to the level of the Chinese, the economy cannot be insulated from external shocks.
"We have a lot of forex reserves. Right now, it is USD 300 billion plus. So, the key question is at what point you feel safe. I think, if you focus only on reserves, there is really no point at which you feel safe—400, 500, 600—any level of reserves, until you get to Chinese level, it is probably not enough," he told researchers and analysts in the customary post-policy concall.
He was answering a question on whether the RBI was comfortable with the current level of reserves. The comments assume importance, as the traditional position of the central bank has been not to set a forex reserves target. China's foreign exchange reserves stood at staggering USD 3.66 trillion as of end 2013, making it the largest in the world, while at the best of times, India could not shore up more than USD 322 billion.
The country's forex reserves rose to USD 298.6 billion in the week ended March 21. But on March 31, Finance Minister P Chidambaram said the reserves had crossed USD 300 billion by that day. RBI would release the formal numbers tomorrow. Since Rajan assumed office on September 4, the reserves have gone up by over USD 25 billion. On August 30 last, the reserves stood at USD 275.5 billion which crossed USD 300 billion as of March 31. The reserves had surged to an all-time high of USD 322 billion in September 2011. Rajan said instead of building just reserves, there is a need to focus on creating policy environment, which boosts investor confidence. "We, at the RBI, have been trying to provide this confidence and I think this is a far better way." The Governor said the central bank's intervention in the foreign exchange market is only to curb volatility caused by the higher inflows or outflows. "Our intervention in exchange market has historically been to reduce exchange rate volatility.
And that's not just the volatility today but also the anticipated volatility if the exchange rate becomes unduly strong because of extreme inflows or unduly weak because of extreme outflows." "So, to the extent we have to intervene to prevent that kind of volatility, we have plenty of reserves," he said.
