After a lull in April-May, the prospects for capital flows to India are improving again. ” As of last Friday, the country’s forex reserves touched $598.2 billion” RBI governor Shaktikanta Das said in his policy statement. ” We are in the striking distance of achieving $600 billion of reserves. Based on our current assessment, we feel that the reserves have already crossed $600 billion”.
Analysis of historical data indicates that the last $100 billion has taken exactly a year to plie-up and the fastest to accumulate in the central bank’s history.
But the rupee liquidity generated by accumulating dollars could impact domestic money market rates. But the central bank seems comfortable the way it is managing the flows. ” At the moment there is no necessity to deploy additional tools to sterilise the forex inflows” the governor said at the post policy media briefing. ” Any case at the end of the day, (through) our daily reverse repo window, the liquidity gets sterilised. It (need for new instruments) will depend on the situation evolves.
On the positive side such inflows help in easing external financing constraints, but could lead to financial market and asset price volatility. In the process there could be “undesirable and unintended fluctuations in liquidity that can vitiate the monetary policy stance” the governor said.
The Reserve Bank has been actively buying and selling dollars in various segments of the market. In FY’21, the central bank bought a net of $68 billion from the spot market alone. “The success of these efforts is reflected in the stability and orderliness in market conditions and in the exchange rate in spite of large global spillovers” the governor said.
Experts feel India’s forex reserve policy is assuming significance in conducting monetary policy. “As with our monetary policy framework, a considered debate around RBI’s exchange management objectives, tools, interlinkages, and outcomes can help instil all-round clarity, credibility and confidence, without compromising on RBI’s operational flexibility” said Professor Ananth Narayan, associate professor and head of research at SP Jain Institute of Management and Research.