IMF advises RBI to go slow on reserves accumulation
Lauding India’s policy efforts to push reserves and strengthen its external position, the multilateral agency has advised the central bank against excessive forex market intervention.” Further accumulation of reserves is less warranted, and foreign exchange intervention should be limited to addressing disorderly market conditions” IMF said in its recently released country report for India.
In the previous report of December 2019, though the multilateral agency had called for alerts about restricting intervention to addressing volatility, this time round it has explicitly called for going slow on reserves pile-up.
“The guiding objectives of foreign exchange reserve management in India are similar to those of many central banks in the world,” the RBI said in the Report on Management of Foreign Exchange Reserves released on Wednesday. The demands placed on the foreign exchange reserves may vary widely depending upon a variety of factors including the exchange rate regime adopted by the country, the extent of openness of the economy, the size of the external sector in a country’s GDP and the nature of markets operating in the country.” While safety and liquidity constitute the twin objectives of reserve management in India, return optimization is kept in view within this framework ” RBI said.
Underscoring that the foreign exchange reserves are adequate for precautionary purposes- $599 billion as of end May’21, IMF said that precautionary accumulation of reserves has mitigated risks due to external vulnerabilities, including potential capital flow volatility and oil price surges. In FY’20-21, RBI’s total forex purchases were equivalent to 5.5 per cent of the country’s GDP, IMF said.
The reserves are at $641 billion as of October 15, according to RBI data. In its latest report , RBI has said that at the end of June 2021, the foreign exchange reserves cover of imports decreased to 15.8 months from 17.4 months at end-March 2021. The ratio of short-term debt (original maturity) to reserves, which was 17.5 per cent at end-March 2021, declined to 16.8 per cent at end-June 2021. The ratio of volatile capital flows (including cumulative foreign portfolio inflows and outstanding short-term debt) to reserves declined from 69.0 per cent at end-March 2021 to 65.5 per cent at end-June 2021
In the April 2021 report, the US treasury report to the Congress titled ” Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States” said that the authorities should allow the exchange rate to move to reflect economic fundamentals, limit foreign exchange intervention to circumstances of disorderly market conditions, and refrain from excessive reserve accumulation. As the economic recovery takes hold, the authorities should continue to pursue structural reforms that can help lift productivity and living standards, including greater openness to foreign financial flows and financial sector deepening, which can further support economic growth.