RBI won’t Consider Economy Fully Insulated until Forex Reserves Match China’s, Says Governor

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RBI won’t Consider Economy Fully Insulated until Forex Reserves Match China’s, Says GovernorThe Reserve Bank of India Governor Raghuram Rajan said that the economy won’t be considered fully insulated from external shocks unless foreign exchange reserves match those of China.

“We have a lot of forex reserves. Right now, it is USD 300 billion plus. So, the key question is at what point you feel safe. I think, if you focus only on reserves, there is really no point at which you feel safe.. 400, 500, 600…any level of reserves, until you get to Chinese level, it is probably not enough,” he told researchers and analysts in the customary post-policy concall.

Chinese foreign exchange reserves were USD 3.66 trillion as of December, the largest such in the world. India’s forex reserves increased to USD 298.6 billion in the week ending March 21. However, Finance Minister P Chidambaram revealed that the forex reserves surpassed USD 300 billion. The Research Bank of India will announced the official figures on Friday.

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India’s foreign exchange reserves have expanded by at least USD 25 billion since Rajan took over as the Governor. The reserves were USD 275.5 billion as of Aug. 30 last year; and surpassed the USD 300 billion mark on March 31. The stockpile had earlier touched a record-high of USD 322 billion in September 2011.

Rajan also said that more focus should also be on creating policies that favor investment.

“We, at the RBI, have been trying to provide this confidence and I think this is a far better way,” he said, according to the Economic Times.

He also clarified that central bank will only intervene in currency markets to minimize shocks caused by high outflows or inflows.

“Our intervention in exchange market has historically been to reduce exchange rate volatility. And that’s not just the volatility today but also the anticipated volatility if the exchange rate becomes unduly strong because of extreme inflows or unduly weak because of extreme outflows.”

To contact the reporter of this story; Yashu Gola at Yashu@forexminute.com