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Forex kitty high, but may not cushion extreme volatility: RBI

RBI Deputy Governor H R Khan on Tuesday said though the country’s forex kitty was at an all time high of USD 330 billion, there should be no complacency as no amount of reserves may be enough to fight extreme volatility.

“Foreign currency reserves have improved. Right now we’re at USD 330 billion, highest ever. But there is also a view that no amount of foreign exchange reserves can cushion when there is extreme volatility or external shocks,” Khan said, days after weekly data showed an over USD 6 billion jump in forex to an all-time high.

“We are much better placed. In terms of fool proofing our balance sheet we have done quite a few things,” Khan said, referring to the jump in reserves.

He said the macro economic vulnerabilities in the country’s economy have “significantly receded” due to the high growth, contained current account deficit, lower inflation and high forex reserves.

“But one cannot be complacent. If another round of Quantitative Easing unwinding happens, we would be the last possibly to be affected….(But we) can’t afford to be complacent and we should be prepared to face vulnerabilities,” Khan said.

“At this juncture India cannot afford to lose the great opportunity it possibly got over so many years. Its strong position among emerging countries,” Khan added.

There has been a view that the RBI has been focusing on accumulating dollars to fight any external challenges in future, like the shift in the US Fed’s policies to tighten which may result in withdrawal of money from emerging markets like India.

It can be noted that the forex reserves had depleted to USD 280 billion as the RBI had to sell to arrest a single way slide in the rupee after the May 2013 announcement by the US Fed to taper its liquidity infusing programme, which resulted in fund outflows from India.

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