Reddy for fine-tuning policy

With corporates and institutions tapping the international markets, there is a need to fine-tune macro policies in a much broader canvass and context, said the Reserve Bank of India (RBI) today.

Domestic corporates and institutions are increasingly accessing the overseas markets with consequent diversification benefits.

While the process has provided more opportunities, it has also brought in new challenges and risks, necessitating a fine-tuning of macro policies in a much broader canvass and context, said RBI governor Y V Reddy in a speech at the Foreign Policy Centre.

Over the years, the country's commercial and financial linkages with the rest of the world have been increasing with trade liberalisation and openness on the capital account.

This is reflected in the transmission of international impulses to the real sector and domestic financial markets, he added. Foreign direct investments (FDIs) increased from less than one per cent of net capital flows in the 1980s to 20 per cent of net capital flows in 2004-05.

Total portfolio investment flows on account of FIIs, GDRs and others were $8.9 billion in 2004-05 on top of net inflows of $11.4 billion in the preceding year.

Reddy also added that India's trade deficit is manageable at this stage and is consistent with the country's growth aspirations.

The compositional shifts in the capital account have been consistent with the policy framework, imparting stability to the balance of payments, said Reddy.

The sustainability of the current account is increasingly viewed as consistent with the volume of normal capital flows.

"The substitution of debt by non-debt flows also gives us room for manoeuvre since debt levels, particularly, external commercial borrowings, have been moderate and can be raised in the event of a sustained pick up in the demand for external resources. There is also the cushion available from the foreign exchange reserves," he added.

The adequacy of foreign exchange reserves is often cited as a consideration for significantly accelerating the pace of financial liberalisation.

Foreign exchange reserves are, in the final analysis, a cushion to withstand both cyclical and unanticipated shocks.

Therefore, reserve adequacy may be a necessary condition but not a sufficient one for speeding up financial liberalisation, Reddy said.