MUMBAI, Feb 10: The former deputy governor of the Reserve Bank of India, S S Tarapore, has warned the RBI against the rising level of short-term debt which has now almost reached the level of foreign exchange reserves of the country.Tarapore said the total shot-term debt liabilities could well exceed $ 23 billion or about 85 per cent of the forex reserves. ``Considering that there would be forward liabilities of the RBI, and these should quite properly be deducted from the forex reserves, the ratio (of short-term debt to forex reserves) could well be close to 100 per cent,'' he said. In simple terms, the entire foreign exchange reserves could be wiped out by the short-term debts.
Calling for urgent RBI action on the debt front, he said,``Without being alarmistic it is essential that there should be close monitoring of this ratio and remedial action should be taken expeditiously to bring down this ratio to safer levels.'' The focus of the policy should be on keeping down short-term debt and in particularthe non-resident deposits of one year and below should be subject to strong disincentives.
Tarapore's warning -- at a seminar organised by the Indian Chamber of Commerce -- has assumed significance as huge short-term debts had caused serious problems in the economies of many South-east Asian countries.
It may be recalled that the Capital Account Convertibility (CAC) committee had recommmended that the debt to forex reserve ratio should not execced 60 per cent. However, the RBI annual report of June 1997 had indicated that this ratio was around 75 per cent. ``The BIS has, in its periodical reports, indicated that India's short-term banking liabilities have increased significantly to to $ 7.5 billion and there is reason to believe that there could have been some further increase since then as a result of the interest rate surcharge on credit for import finance,'' he said.
According to him, the short-term debt has a ``knack of increasing sharply and the inability to roll over such debt also takes placewithout warning''. ``Hence a salutary policy would be to cut back short-term liabilities from a position of strength,'' Tarapore said. Thus, shorter the maturity of the trade credit, sharper the incidence of the tax. This measure will result in an initial fall in the reserves but it is better to let reserves fall when they are relatively high rather than when at a rock-bottom.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
