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Forex reserves below Chinese level not comfortable: Rajan

If you focus on reserves, there is no point at which you feel safe ...until you get to Chinese level, it is probably not enough, said Raghuram Rajan.

By: ENS Economic Bureau | Mumbai | Published: April 4, 2014 1:06:44 am

Reserve Bank of India Governor Raghuram Rajan wants to match China in accumulating foreign exchange reserves as India’s current reserves are “probably not enough” to “feel safe”.

Is the RBI comfortable with India’s reserves adequacy position? Does it make sense to augment forex reserves at this stage?

“We have a lot of reserves. Right now, $300 billion plus. So the key question is at what point do you feel safe?”, he asked. “And I think if you focus only on reserves there is  really no point at which you feel safe, because provided there is enough uncertainty about the economy, uncertainty about conditions, uncertainty about the treatment of international investors, 400, 500, 600 any level of reserves, until you get to Chinese levels, is probably not enough,” Rajan said in a conference call with researchers and analysts after the monetary policy review. China’s forex reserves hit $3.8 trillion ($ 3,800 billion) last year, which is 12 times more than India’s current forex reserves of $300 billion.

“Our intervention in exchange markets have historically been to reduce exchange rate volatility and that is not just volatility today but also anticipated volatility if the exchange rate becomes unduly strong in a short while because of extreme inflows or unduly weak in a short while because of extreme outflows. So to the extent that we have to intervene to prevent that kind of volatility, we have plenty of reserves,” Rajan said.

After Rajan assumed office on September 4, 2013, the reserves have gone up by over $25 billion. The reserves had surged to an all-time high of $322 billion in September 2011.

“Our primary attempt is to reduce exchange rate volatility, and that is where our exchange intervention goes. Right now the oil marketing companies have bought what they need in the markets and are paying us back, and to that extent there will be some reserve accumulation. But as I said before, I do not think we are targeting a level of reserves, primarily because we believe that even with our current level that is pretty substantial,” he said.

“If there are occasions when in order to reduce substantial volatility we have to pick up reserves in the market, we will do so, we are not averse to that. But there is no target that we have in mind that we are going towards,” Rajan said.

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