 "Intervention difficult when currency falls sharply, says RBI")
India's central bank might have found it difficult to stem the rupee's sharp depreciation during the currency crisis of 2013 by using its foreign exchange reserves, with the country's external liabilities far exceeding official reserves.
In a speech at a recent event at Cape Town, South Africa, Reserve Bank of India's Deputy Governor H R Khan had highlighted the importance of building foreign exchange reserves to deal with sudden outflows.
"Intervention in the face of the sharp depreciation is a difficult choice for several reasons, including loss of reserves, particularly in a country like India where the external liabilities far exceed the official reserves," Khan said.
RBI was cautious in using its foreign exchange reserves to stem the sharp depreciation, which dipped to over a three-year low in late August. The rupee hit an all-time low of 68.83 on August 28, 2013, but started recovering since the beginning of September on the back of a slew of measures initiated by the central bank to attract inflows. These measures also helped to build foreign exchange reserves, which now stand at $ 309.4 billion, as on April 11. Foreign exchange reserves swelled by about 36 billion in the last seven months and are at a two-and-a-half-year high.
"The importance of a sufficiently large kitty of official reserves to deal with sudden flow reversals has been underscored time and again. In fact, the large reserves that many emerging market economies have built up post Asian crisis is often viewed as a bulwark against contagion effects of global crises and risk aversion," Khan said.
"Therefore, accumulation of reserves as an objective by itself rather than a by product of market actions of the central bank to stabilise the exchange rate is a theme that cannot be dismissed out of hand, more so when there is no assured and easy access to any collective insurance for emerging market economies like India," he added.
According to experts, the country's foreign exchange reserves should be able to cover imports for eight-10 months, as this is seen as a key to the currency's stability. During the height of the currency crisis in 2013, the import cover fell to 6.5 to seven months.
Last week, RBI Governor Raghuram Rajan said though the country had enough foreign exchange reserves, no nation could fully insulate itself from external vulnerabilities.
"We are well-buffered with substantial reserves, though no country can be de-coupled from the international system," Rajan had said at a conference in Washington last week.
In a speech at a recent event at Cape Town, South Africa, Reserve Bank of India's Deputy Governor H R Khan had highlighted the importance of building foreign exchange reserves to deal with sudden outflows.
"Intervention in the face of the sharp depreciation is a difficult choice for several reasons, including loss of reserves, particularly in a country like India where the external liabilities far exceed the official reserves," Khan said.
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Between April and August, 2013, the rupee depreciated about 19 per cent against the dollar following fears of the US Fed's tapering programme and also, weak domestic fundamentals like high current account deficit aggravated the problem.
RBI was cautious in using its foreign exchange reserves to stem the sharp depreciation, which dipped to over a three-year low in late August. The rupee hit an all-time low of 68.83 on August 28, 2013, but started recovering since the beginning of September on the back of a slew of measures initiated by the central bank to attract inflows. These measures also helped to build foreign exchange reserves, which now stand at $ 309.4 billion, as on April 11. Foreign exchange reserves swelled by about 36 billion in the last seven months and are at a two-and-a-half-year high.
"The importance of a sufficiently large kitty of official reserves to deal with sudden flow reversals has been underscored time and again. In fact, the large reserves that many emerging market economies have built up post Asian crisis is often viewed as a bulwark against contagion effects of global crises and risk aversion," Khan said.
"Therefore, accumulation of reserves as an objective by itself rather than a by product of market actions of the central bank to stabilise the exchange rate is a theme that cannot be dismissed out of hand, more so when there is no assured and easy access to any collective insurance for emerging market economies like India," he added.
According to experts, the country's foreign exchange reserves should be able to cover imports for eight-10 months, as this is seen as a key to the currency's stability. During the height of the currency crisis in 2013, the import cover fell to 6.5 to seven months.
Last week, RBI Governor Raghuram Rajan said though the country had enough foreign exchange reserves, no nation could fully insulate itself from external vulnerabilities.
"We are well-buffered with substantial reserves, though no country can be de-coupled from the international system," Rajan had said at a conference in Washington last week.