1. ‘Forex kitty high, but may not cushion extreme volatility’

‘Forex kitty high, but may not cushion extreme volatility’

The RBI may have shored up the country’s reserves to an all-time high by aggressively mopping up dollars...

By: | Mumbai | Published: February 11, 2015 12:15 AM

The RBI may have shored up the country’s reserves to an all-time high by aggressively mopping up dollars, but it is not ready to rest easy, according to deputy governor HR Khan. “No amount of foreign exchange reserve can cushion when there is extreme volatility and external shocks,” said Khan during an event on Tuesday.

India’s foreign exchange reserves touched an all-time high of $328 billion as of January 30 on the back of dollar purchases by the RBI. The central bank has purchased a massive $75 billion from the spot and forward markets during April-December.

The swell in the forex kitty has dispelled concerns over the country’s external debt and the low import cover. At current levels, reserves provide around eight months of import cover. Khan said the macroeconomic vulnerabilities of the country has reduced considerably given the improvement in GDP, current account deficit, the fall in inflation and the increase in reserves.

“But one cannot be complacent. If another round of quantitative easing unwinding happens, we would be the last possibly to be affected. So, we can’t afford to be complacent and we should be prepared to face vulnerabilities,” Khan added. He further warned corporates of having large unhedged forex exposures through borrowing overseas.

“Unhedged exposures are not only a threat to individual companies, but also to the system and the system stability. We will certainly not like to micro-manage what is otherwise a commercial decision.”

Last year, Khan had said the hedge ratio of Indian companies has fallen to a mere 15%. He said corporates may face challenges in raising loans in the future as there is likely to be greater scrutiny of various institutions, including the lenders and analysts.

“One challenge that corporates might face going ahead is in terms of raising resources, not in terms of non-availability of resources but because how the debtors expect commitments.

“It is very likely, in the days ahead, we will experience enhanced scrutiny of credit institutions, of banks by depositors and tax payers, and of analysts and shareholders,” he said.

With massive fluctuations in currency, there might be a case for even non-financial companies to undergo a stress test. “Going ahead, non-financial companies might think of some kind of stress-test, which financial firms do,” he added.

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