India vulnerable to sudden outflow of forex: RBI
RBI Governor D Subbarao, says that among the components of capital flows, India prefers long-term flows to short-term flows and non-debt flows to debt flows.
By PTI |
MUMBAI: The Reserve Bank today warned that India's foreign exchange reserves mostly comprise borrowed funds and the country is vulnerable to sudden outflow of funds.
"Our reserves comprise essentially borrowed resources, and we are therefore more vulnerable to sudden stops and reversals, as compared with countries with current account surpluses," RBI Governor D Subbarao said at the Special Governors' Meeting in Kyoto, Japan.
India's foreign exchange reserves increased by $1.97 billion to $299.39 billion for the week ended January 21. The forex reserves were $297.41 billion in the previous week ending January 14.
He further said that India's forex reserves are a result of capital inflows in excess of its economy's absorptive capacity.
He added that among the components of capital flows, India prefers long-term flows to short-term flows and non-debt flows to debt flows.
"India has experienced both 'floods' and 'sudden stops' of capital flows. India has followed a consistent policy on allowing capital inflows in general and on capital account management in particular," Subbarao said.
FDI has dipped 26 per cent during January-November 2010 to about USD 19 billion from USD 25.5 billion in the year-ago period.
During 2010, FIIs whose investments have often been called 'hot money' because they can be pulled out anytime, have purchased stocks and debt securities worth Rs 9,60,000 crore. At the same time, FIIs sold shares and bonds worth Rs 7,80,000 crore during the year -- still leaving behind a record net investment of over Rs 1.75 lakh crore for the year.
He further said that India should move towards capital account convertibility gradually, taking cues from domestic and global developments.
"We believe our economy should traverse towards capital convertibility along a gradual path - the path itself being recalibrated on a dynamic basis in response to domestic and global developments," Subbarao added.
Capital account convertibility is the freedom to convert local financial assets into foreign financial assets and vice versa at market determined rates of exchange. It allows anyone to freely move from local currency into foreign currency and back.
In the aftermath of financial meltdown, the RBI had adopted a cautious stance on financial reforms, including full convertibility of the local currency.
Subbarao added that RBI doesn't disclose the currency composition of the country's reserves and it has been criticised for lack of communication in this regard.
"The information is market sensitive and disclosure could potentially impact our commercial interests adversely. Disclosure also has wider implications for our international relations," Subbarao added.
"Our reserves comprise essentially borrowed resources, and we are therefore more vulnerable to sudden stops and reversals, as compared with countries with current account surpluses," RBI Governor D Subbarao said at the Special Governors' Meeting in Kyoto, Japan.
India's foreign exchange reserves increased by $1.97 billion to $299.39 billion for the week ended January 21. The forex reserves were $297.41 billion in the previous week ending January 14.
He further said that India's forex reserves are a result of capital inflows in excess of its economy's absorptive capacity.
He added that among the components of capital flows, India prefers long-term flows to short-term flows and non-debt flows to debt flows.
"India has experienced both 'floods' and 'sudden stops' of capital flows. India has followed a consistent policy on allowing capital inflows in general and on capital account management in particular," Subbarao said.
ADVERTISEMENT
FDI has dipped 26 per cent during January-November 2010 to about USD 19 billion from USD 25.5 billion in the year-ago period.
During 2010, FIIs whose investments have often been called 'hot money' because they can be pulled out anytime, have purchased stocks and debt securities worth Rs 9,60,000 crore. At the same time, FIIs sold shares and bonds worth Rs 7,80,000 crore during the year -- still leaving behind a record net investment of over Rs 1.75 lakh crore for the year.
He further said that India should move towards capital account convertibility gradually, taking cues from domestic and global developments.
"We believe our economy should traverse towards capital convertibility along a gradual path - the path itself being recalibrated on a dynamic basis in response to domestic and global developments," Subbarao added.
ADVERTISEMENT
Capital account convertibility is the freedom to convert local financial assets into foreign financial assets and vice versa at market determined rates of exchange. It allows anyone to freely move from local currency into foreign currency and back.
In the aftermath of financial meltdown, the RBI had adopted a cautious stance on financial reforms, including full convertibility of the local currency.
ADVERTISEMENT
Subbarao added that RBI doesn't disclose the currency composition of the country's reserves and it has been criticised for lack of communication in this regard.
"The information is market sensitive and disclosure could potentially impact our commercial interests adversely. Disclosure also has wider implications for our international relations," Subbarao added.
Download
The Economic Times Business News App for the Latest News in Business, Sensex, Stock Market Updates & More.
The Economic Times Business News App for the Latest News in Business, Sensex, Stock Market Updates & More.
Download
The Economic Times News App for Quarterly Results, Latest News in ITR, Business, Share Market, Live Sensex News & More.
The Economic Times News App for Quarterly Results, Latest News in ITR, Business, Share Market, Live Sensex News & More.
Related Articles
MSMEs are India's entrepreneurship nursery, RBI to continue strong support: Governor MalhotraADVERTISEMENT
