Need to build up forex reserves as buffer against crises: Thorat

RBI deputy governor expects the economy to grow around 6% in 2009-10.

Reserve Bank of India (RBI) Deputy Governor Usha Thorat on Monday said India needed to build foreign exchange reserves when the going was good, so that it could use them as a buffer during crises.

“We have all learnt to build reserves when the going is good. The cost of sterilisation, indirect or direct, does not matter. But it will come in handy when really needed,” Thorat said addressing the 20th Annual Forex Assembly here.

India's foreign exchange reserves, which had topped $316 billion in May 2008, have come down to about $281 billion.

Thorat said countries such as India would have to manage and deal with volatile forex flows.

RBI's policy is to encourage genuine inflows and discourage flows aimed at reaping arbitrage opportunities.

She said foreign flows supplemented domestic savings and helped boost growth.

Thorat also said the Indian economy was likely to grow around 6 per cent in 2009-10 (April-March).

In 2008-09, India had grown 6.7 per cent, lower than around 9 per cent in the three previous years.

Thorat said portfolio inflows and short-term trade credit shot up in April-June.

However, she said, according to international credit agencies, trade flows and remittances, which had declined sharply following the global financial crisis, would take time to get back to normal.

She said reversal of capital flows could be destabilising for economies.

She declined to comment on increasing banks’ held-to-maturity cap for government securities.

At present, banks can keep a maximum of 25 per cent of their net demand and time liabilities in the segment. They have requested the central bank to increase this limit by 2-3 per cent.