Forex reserves enough to handle one-off deterioration in risk sentiments: Radhika Rao DBS

Country’s foreign exchange are at a new high. But with the talks of an Fed unwinding, the rupee has started weakening against the dollar and has dipped more than 2% since the RBI release on forex reserves. But a crisis of confidence like 2013-14 is unlikely to be repeated, says Radhika Rao, Chief India Economist at DBS

Edited excerpts:

With foreign exchange reserves at a record high of $400 billion, has the country arrived in terms of financial stability?

Record high foreign exchange reserves are commendable. The position is comfortable at 10-12 months’ import coverage and at four times short-term external debt. The reserves still lag total external debt but the gap has narrowed compared to 2013-14. Higher reserves certainly are a key defence for the economy against unexpected external shocks.

Whenever a currency crisis occurred in the past, be it 1991, 1998 or even 2013, it was mostly due to weak reserves position. Can we conclude that this time it is different and the crisis cannot hit India hard?

High reserves do place the economy at a position of strength and helps defend against any global shocks. Duration and depth of any global crisis will dictate how much pain can be endured, but one-off deterioration in risk sentiments can be handled through the current stock

In the past, India had to resort to quick fund raising to battle currency slide, like Resurgent India Bonds, gold pledge, India Millennium Bonds and even the FCNR B deposits of 2013. Can we conclude that this time we don’t need such a tool?

At this juncture, the reserves stock should be able to sustain against any sharp outflows, but if the shock lasts longer and leads to a sharp withdrawal in outflows in a short period of time, such tools will be required. One-off shocks will not require us to go for any extraordinary measures

Is it sufficient to face any headwinds arising out of global financial market turmoil, including the Fed unwind?

US Fed has conveyed a very gradual pace of quantitative – QE - normalisation, expected to last over three-four years. Beyond the initial spate of unease when markets catch up with Fed’s policy normalisation path, we reckon that reserves are sufficient to handle any intermittent weakness in risk-sentiments

Is India's macro different this

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