Improved forex reserve provided India's policymakers room for manoeuvre: BIS report

India's improved forex reserve adequacy helped maintain investor confidence and improved policymakers' room for manoeuvre, said a report prepared by Bank for International Settlements (BIS). India maintained forex reserve upwards of USD 550 billion during most of 2022.

BIS is an international financial institution which is owned by member central banks with primary goal to foster international monetary and financial cooperation.

"Several members noted that the development of deeper and more liquid FX markets in the past facilitated efficient price discovery during 2022 and reduced the need for FX interventions or capital flow measures (CFMs) (including China, Indonesia and Malaysia)," the report said.


In addition, minimum hedging requirements on corporates' net liability exposure in the past helped build firms' resilience and also mitigated the need for (or intensity of) an ex-post policy response in 2022, the report titled 'Inflation, external financial conditions and macro-financial stability frameworks in Asia-Pacific' said.

"In a similar vein, improved FX reserve adequacy helped maintain investor confidence and improved policymakers' room for manoeuvre (eg. in India)," it said.

India announced several measures to liberalise capital flows in July 2022 while taking steps to ensure overall macroeconomic and financial stability to stem decline in forex reserve.

During 2022, it said, many regional economies saw the use of FX-related macroprudential measures or other CFMs.

A selection of these measures included increasing the limit for external commercial borrowing and relaxing restrictions on foreign investment in debt markets (India), having in place limits on domestic currency lending or borrowing by non-residents without an underlying trade or investment (Thailand) and limits on foreign investment in certain sectors (Vietnam), it said.

Observing that several central banks noted the use of communication policy, the report said regular communication as part of the monetary policy process helped keep inflation expectations anchored in India and Malaysia.

Effective policy communication helped anchor inflation expectations and thus assisted in maintaining stability, it said.

In India, it said, apart from forward guidance, communications were also used to explain the rationale for the measures being taken by the RBI, while also seeking to inspire confidence and optimism for the general public during the Covid pandemic.

While a flexible exchange rate was generally seen as a shock absorber for external price shocks, some authorities used FX interventions to minimise the risk of excessive exchange rate movements (especially depreciations) and thus dampen the pass-through to inflation (eg. the Philippines and Vietnam), it said.

Relatedly, exchange rate intervention also helped anchor expectations and facilitated the overarching objective of maintaining macroeconomic stability and market confidence (eg. in India), it added.