10% Forex Reserves Cap On Rbi Forward $ Sales

The government, in consultation with the RBI, has decided that the central bank will not sell forward dollars in excess of 10 per cent of the forex reserves.

This was indicated by Union finance secretary Montek Singh Ahluwalia at a seminar here yesterday on Indias response to the Southeast Asia meltdown. The latest figures put the RBIs forex reserves at $27,385 million, as on January 29. The RBI had sold forward dollars worth $1,956 million by the end of December 1997.

The 10% cap indicated by the finance secretary appears to be applicable to RBIs outright transactions in the forward market. However, the RBI intervenes in the forward market mainly through swaps.

 

Speaking at the Ficci seminar, Ahluwalia assuaged fears of burgeoning short-term debt and said the current level was around $7bn. However, he conceded there were differences in methods of measuring short-term debt.

Kotak Mahindra Finance vice chairman Uday Kotak said suppliers credit should be included while computing the volume of short term debt.

Ahluwalia later told repor-ters that the government would consider tapping overseas debt in the next fiscal. He also indicated that FIIs would be allowed to invest in treasury bills in the next financial year.

Ahluwalia said the government was initially hesitant to let FIIs invest in T-bills in view of its bearing on short-term external debt.

Foreseeing a deceleration in world output, Ahluwalia predicted that world trade would decline, affecting Indian exports. However, the decline in Indias export growth rate should not affect domestic GDP growth since exports constitute just 8 per cent of Indias GDP, he said. Listing the lessons to be drawn from the East Asian experience, Ahluwalia said not only should the fiscal deficit and current account deficit be kept in check, short term borrowings should also be strictly monitored.

He added that there was a need to strengthen the domestic financial system and make the regulatory system more effective. Further, forex reserves should not be onlent by the central bank but should be deployed in highly liquid and safe assets.

Ahluwalia also indicated that adequacy of reserves should be measured not just in terms of import cover but also the extent of potential short term outflows. FII investments in debt, he said, constituted hot money, but stocks were relatively safer as FIIs could not possibly liquidate all their stock holdings without suffering heavy losses.

Ahluwalia concluded by underscoring the need for information dissemination to ensure that signals of an impending crisis are picked up in time.