No Cap On Forex Intervention: Yv Reddy

Subtle differences have crop-ped up between the Reserve Bank and the finance ministry on the issue of a cap on forward intervention by the central bank in the forex market.

Speaking at a seminar in Mumbai yesterday, RBI deputy governor Y V Reddy said the central bank generally limits its aggregate outstanding liabilities and rarely crosses 10 per cent of forex reserves. But Reddy made it clear that there was no cap. Of course there is no rigid rule, said Reddy. This is at variance with the statement made by finance secretary Montek Singh Ahluwalia on Thursday.

Ahluwalia had said in Mumbai that the government, in consultation with the RBI, had decided that the apex bank would not sell forward dollars in excess of 10 per cent of the level of forex reserves. Sources pointed out that a cap of 10 per cent would severely curtail interventions by the RBI. They added that this figure could at best be treated as a prudential limit.

Delivering the keynote address at a CII seminar on the Emerging Scenario in Foreign Currency Management in Mumbai, Reddy said the exchange rate is flexible but volatility has been and is being checked by the RBI. He indicated that short term debt as a proportion of the reserves is around 27 per cent while it is about seven per cent as a percentage of total external debt.

The deputy governor spelt out five areas of concern, relating to the macroeconomy, external sector management, financial sector regulation, the corporate sector and the broader issue of systemic transparency, but said there was no need for pessimism.

Reddy said, We undertook financial sector reforms as a prelude to liberalisation of some capital account transactions. We discourage banks from investing in real estate and stock markets. NBFCs are now subject to regulation. Corporate exposure to debt, specially external debt, is within reasonable limits.