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Additional $60 billion forex needed to fight volatilities: HSBC

As India’s forex kitty is growing steadily, foreign brokerage HSBC on Friday said the country needs at least USD 60 billion more in reserves to fight a sustained period of global volatilities.

According to the global financial services major, India’s forex reserves are above traditional norms but the country’s “peculiar characteristics and experience” in recent crises suggest that about USD 60 billion more could buffer sufficiently against prolonged global financial tightness.

“We estimate an additional USD 60 billion of reserves, taking overall holdings to USD 420 billion, could take care of key vulnerabilities (such as unhedged external commercial debt, short-term external debt and portfolio outflows),” HSBC India Chief Economist Pranjul Bhandari said in a research note.

HSBC said India had lost USD 20 billion of foreign exchange reserves over the “taper tantrum” months of 2013.

However, since then, it has built up more than four times that amount.

At present, with about USD 360 billion (including USD 5.2 billion of net forward position) in reserves, India boasts of an import cover which is three times as large as the IMF’s recommended value of three months, HSBC said.

Buying USD 60 billion of additional reserves would cost India USD 3.2 billion, the report said, adding that “anything more than this could really start hurting the fiscal balance”.

The report noted that forex reserves are not the only line of defence available and as a second line of defence to forex reserves, swap arrangements with bilateral and regional partners, and similar mechanisms with G20 countries and multilateral organisations should be actively explored.

“Ultimately keeping the macro house in order, like lowering the twin deficits and inflation sustainably and increasing potential growth, is more important than reserve accumulation, as it can single-handedly make the economy resilient to shocks,” HSBC said.

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