NEW DELHI (CU)_Over the recent past, the Reserve Bank of India continued to stock dollars in order to shield the economy from the effect of any sudden outflows. This, along with a rise in foreign direct investments and inflows into the booming stock market has resulted in the South Asian nation’s foreign exchange reserves exceeding $600 billion. This is said to be sufficient to cover more than a year’s worth of imports into the country.
According to RBI Governor Shaktikanta Das, this significant rise in India’s foreign exchange reserves will be a huge buffer that will help shield the economy from volatile external flows as well as global spillovers.
“While these flows ease external financing constraints, they also impart volatility to financial markets and asset prices, while producing undesirable and unintended fluctuations in liquidity that can vitiate the monetary policy stance,” he said. As a result, the RBI has intervened in spot, forward and futures markets, in order to ensure that monetary policy remains independent by stabilising financial market and liquidity conditions, Das said.
“The success of these efforts is reflected in the stability and orderliness in market conditions and in the exchange rate in spite of large global spillovers,” he added. “In the process, strength is imparted to the country’s balance sheet by the accumulation of reserves.”
These comments made by the central bank chief suggest that the RBI is attempting to managed what is known as the “Impossible Trinity” or the “Trilemma”, which is to allow a steady flow of foreign capital while maintaining the independence of the monetary policy and keeping the currency stable. According to experts, Das’ comments also imply the fact that amid such dilemma of managing these policy goals, the RBI would side with pursuing the independence of monetary policy and keeping the currency stable, while having a buffer against the effects on any implications on foreign capital flows.
