Cushion of forex reserves must: Reddy

Y V Reddy, Governor of Reserve Bank of India, said emerging market economies were always wary that capital flows could slow down, and foreign exchange reserves were needed as a cushion when markets turned risk averse.

"With the global rise in the interest rates, there is always a lurking fear in the emerging market economies that the level of capital flows may not be maintained. Thus, the comfort level of reserves should not be viewed with respect to the current situation alone but should also reckon the assessment of the emerging risks.

"Moreover, at this moment, the global economy has not been tested on the eventuality of a not-so-orderly correction of the current global imbalances. In that eventuality, as the experts caution, disruption in financial markets in the form of large cross-currency volatility and sharp rise in interest rates are not unlikely in the global economy," Reddy said while addressing a seminar entitled "Problems of Plenty? Challenges and Opportunities from the Accumulation of Large Foreign Exchange Reserves and Windfall Revenue" in Singapore yesterday.

"Disruption in financial markets in the form of large cross-currency volatility and sharp rise in interest rates are not unlikely in the global economy," Reddy said in speech, which was posted on the website of the central bank today.

Click here to read the entire speech