Letters: Other safeguards for RBI

This refers to Jaimini Bhagwati's article "The rupee and risks" (June 21). In the context of volatile capital flows used to finance the current account deficit, the author says "we should aim to raise our foreign exchange reserves to about $600 billion over the medium term (from $300 billion or less at present)". Additional reserves are one kind of safeguard. International credit lines are another. The cost of a credit line can work out less than the opportunity cost of reserves. So we should, at the margin, think more in terms of credit lines rather than additional reserves. The idea is not to replace reserves with credit lines, but to have an optimal mix of the two reserves and credit lines. It is important to provide a perspective. Consider firms, households, commercial banks and central banks. For precautionary liquidity, firms rely more on credit lines than on cash (reserves). Households have increasingly shifted from cash to credit cards (a form of credit line). Commercial banks rely primarily on the central bank as the lender of last resort (an implicit credit line). It is only central banks that rely primarily on reserves rather than on credit lines. It is high time they modernised as well. They can get macro-financial stability at lower cost by having some credit lines. It is true that central banks are different, but they , too, have similarities with firms, households and commercial banks.

Gurbachan Singh, Gurgaon

 
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