RBI To Keep Hawks Eye On Money Markets

Mumbai, October 29: | Updated: Oct 30 2002, 05:30am hrs
The Reserve Bank of India (RBI) will continue to follow the approach of watchfulness, caution and flexibility by closely monitoring the developments in the financial markets at home and abroad. It will co-ordinate its market operations carefully, particularly in regard to the forex market with appropriate monetary, regulatory and other measures as considered necessary from time to time.

The RBI will also set up a working group with appropriate representations from the market to look into, inter alia, the possible ways of extending types of derivatives that are available in the foreign currency segment to rupee derivatives. The Group will also review the guidelines for OTC rupee derivatives in India and suggest further developments in this market.

On the high level of reserves RBI governor Bimal Jalan said that sharp exchange rate movements can be highly disequilibrating and costly for the economy during periods of uncertainty or adverse expectations, whether real or imaginary. These economic costs are likely to be substantially higher than the net financial cost, if any, of holding reserves. In this context, it is important to note that in India, in the last few years, almost the whole addition to reserves has been made without increasing the overall level of external debt. The increase in reserves largely reflects higher remittances, quicker repatriation of export proceeds and non-debt inflows. Even after taking into account foreign currency denominated NRI flows, the financial cost of additional reserve accretion in India in the recent period is quite low, and is likely to be more than offset by the return on additional reserves. The governor wanted to emphasise that he was not borrowing and for all incremental forex balance, rupee had been given out. Hence net-net, there is no increase in reserves, but only a substitution of Indian currency for internal ones. He wanted to convey the message that he is comfortable with the policy being followed, said Standard Chartered Bank regional general manager Jaspal Bindra.