Rajan: No Fx reserves large enough to ward off external shocks

Reserve Bank Governor Raghuram Rajan has said though the country has enough foreign exchange reserves, no nation can fully insulate itself from external vulnerabilities.

"We are well-buffered with substantial reserves, though no country can be de-coupled from the international system," Rajan said at a conference organised by the Brookings Institution in Washington yesterday.

In the just-concluded financial year, the country's forex reserves crossed USD 300 billion-mark, the highest since December 2011.

For the week to March 28, the reserves rose by a whopping USD 5.038 billion to USD 303.673 billion, the second highest in the fiscal. During the period, foreign currency assets also jumped by USD 5.011 billion to USD 276.406 billion.

"My remarks are motivated by the desire for a more stable international system, a system that works equally for rich and poor, large and small, and not the specifics of our situation," Rajan said.

Talking about the unconventional policy in industrial countries, he said when monetary policy in large countries is extremely and unconventionally accommodative, capital flows into recipient countries tend to increase local leverage.

"This is not just due to the direct effect of cross-border banking flows but also the indirect effect, as the appreciating exchange rate and rising asset prices, especially of real estate, make it seem that borrowers have more equity than they really have," he said.

Exchange rate flexibility in recipient countries in these circumstances sometimes exacerbates booms rather than equilibrates, he added.

In the recent episode of emerging market volatility after the Fed started discussing taper in May 2013, countries that allowed the real exchange rate to appreciate the most during the prior period of quantitative easing suffered the greatest adverse impact vis-a-vis financial conditions, Rajan said.

It can be recalled that at the customary post-policy concall with analysts on April 2, Rajan had said that forex reserves below Chinese level was not a comfort zone.

"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 had told researchers and analysts.

The comments assumed importance as the traditional position of the central bank has been not to set a forex reserves target. China's foreign exchange reserves stood at a staggering USD 3.66 trillion as of end 2013, making it the largest in the world, while at the best of times, India could not shore up more than USD 322 billion.