No foreign exchange reserves large enough to ward off external shocks: Rajan

Mumbai: RBI Governor, Raghuram Rajan stated that though the country has enough foreign exchange reserves, no nation can fully insulate itself from external vulnerabilities. "We are well-buffered with substantial reserves, though no country can be de-coupled from the international system," said Rajan at a conference.

In the recent financial year, the country's forex reserves crossed USD 300 billion-mark, the highest since December 2011. For the week to March 28, the reserves rose by a whopping USD 5.038 billion to USD 303.673 billion, the second highest in the fiscal. During the period, foreign currency assets also jumped by USD 5.011 billion to USD 276.406 billion. "My remarks are motivated by the desire for a more stable international system, a system that works equally for rich and poor, large and small, and not the specifics of our situation," added Rajan. Commenting on the unconventional policy in industrial countries, he further stated that when monetary policy in large countries is extremely and unconventionally accommodative, capital flows into recipient countries tend to increase local leverage.

"This is not just due to the direct effect of cross-border banking flows but also the indirect effect, as the appreciating exchange rate and rising asset prices, especially of real estate, make it seem that borrowers have more equity than they really have," added more. Exchange rate flexibility in recipient countries in these circumstances sometimes exacerbates booms rather than equilibrates, he added. In the recent episode of emerging market volatility after the Fed started discussing taper in May 2013, countries that allowed the real exchange rate to appreciate the most during the prior period of quantitative easing suffered the greatest adverse impact vis-a-vis financial conditions, said Rajan.

The comments assumed 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 a 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.