Mumbai, Feb 19: The finance ministry has capped the Reserve Bank of India's forward operations at around 10 per cent of the country's forex reserves, finance secretary Montek Singh Ahluwalia said on Thursday in Mumbai. Ahluwalia was delivering the inaugural address at the seminar on "South-East Asian Meltdown: The Indian Response" organised by the Federation of Indian Chambers of Commerce & Industry (Ficci)."Forward transactions of the Reserve Bank are currently within 10 per cent of the total foreign exchange reserves," Ahluwalia told the seminar.
Ahluwalia's announcement in effect means that the Reserve Bank's forward operations will not cross $2.7 billion as the forex reserves (including gold and SDRs) are now pegged at $27.74 billion. The objective of restricting the Reserve Bank's exposure in forwards is to maintain stability in the forex market. Analysts, however, said the capping of the Reserve Bank's forward operations at a certain level may fuel speculators' attack on the currency. "Once thequantum of forward operations is fixed, it will reduce the Reserve Bank's manoeuvrability in the market and in the short run can encourage speculators to take positions," said a chief dealer of a foreign brokerage.
Ahluwalia ruled out any South-East Asian type currency crisis in India as the size of the country's short-term debt is very low. "The size of the short-term debt is more important than the total size of forex reserves.
There is no need to panic as our short-term debt is in the region of $7 billion out of the $27 billion forex reserves," the finance secretary said.
He defended the government's action of forcing corporates to borrow long-term funds saying, "we reduced the flexibility of Indian corporates' borrowing programme. In the trade-off, we insulated the Indian economy from the panic reaction that the South-East Asian economies were subjected to. This is a vindication of the centre's policy on external commercial borrowings."
Two other factors which rule out the contagion effect inIndia, according to the finance secretary, are strong economic fundamentals and a steady banking system. "We are not suffering from too much injection of foreign funds. The current account deficit is about 1.4 per cent of the GDP," he said. The Indian banking system does not borrow heavily from abroad and its assets are not in real estate and shares, he added.
Referring to the banking sector's non-performing assets (NPAs), Ahluwalia said the net non-performing assets (NPAs) level has dropped sharply. The cost of corporate borrowing can only go down if the banks are able to lower their NPAs. The restructuring process of the banking sector will be kicked off once the second Narasimham committee report is submitted. The committee is expected to submit the report by the end of March. "It will identify the unfinished agenda of the banking sector reforms," Ahluwalia said.
INSIGHT -- interventions may rise due to spot market
The finance secretary's remarks on intervention in the forwards, taken togetherwith his advice to exporters not to focus on the exchange rate are meant to send a signal that the government will defend the level of the rupee.
While $2.7 billion is a lot of money to be spent on intervention in the forward market, it will be noticed that nothing has been said as regards intervention in the spot market, which perhaps means that the amount of total intervention could be more, if necessary.
The finance secretary is also probably aware that while the rupee has achieved a soft landing, the markets are very thin.
The intention, therefore, is also to signal to exporters that they will not benefit by delaying repatriation of their proceeds.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
