MUMBAI, February 19: In a far-reaching move, the Finance Ministry has capped the Reserve Bank of India's forward operations at 10 per cent of the country's forex reserves, Finance Secretary Montek Singh Ahluwalia said here today.In effect, the Reserve Bank's forward operations will not cross $2.7 billion as the forex reserves (including gold and SDR) are now pegged at $27.74 billion. The objective of restricting the Reserve Bank's exposure in forward markets is to maintain stability in the forex market, he said.
Ahluwalia ruled out any South-east Asain type crisis in India as the size of the country's short term debt is very low. "The size of 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 $27 billion forex reserves," the finance secretary said, while delivering the inaugural address at the seminar on "Southeast Asian meltdown: The Indian Response" organised by the Federation of Indian Chambersof Commerce & Industry (Ficci).
He defended the government's action of forcing corporates to borrow long term 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 S-E Asian economies were subjected to. This is a vindication of the Centre's policy."
Analysts, however, said the capping of the Reserve Bank's forwards operations at a certain level may fuel speculators' attack on the currency."Once the quantum 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 predicted difficult times for Indian exports in the next two years as there was a general slowdown of world economy. "There will be a slowdown in exports for everybody and not just for India. There will be a global slowdown and the deceleration in the OECD countries is expected tobe by 0.5 per cent," he said.
He urged the Indian exporters to achieve an export growth of 10 to 12 per cent, which would be at a growth rate more than GDP of the country.Malaysian exports comprised 73 per cent of its GDP, against India's ratio of eight per cent. "A ratio of 10-12 per cent would suit us", he said.
Ahluwalia attempted to dispel fears of erosion of Indian export competitiveness due to currency depreciation in these countries saying, Indian exporters should capitalise on the disruption of economic activities in the region.
"India is not suffering from too much dependence on foreign funds," he said, though recognising there would be spillovers in terms of inflows of foreign funds.
No rupee devaluation
MUMBAI: Finance secretary Monket Singh Ahluwalia has ruled out any competitive devaluation of the rupee to boost exports.
"We should not focus too much on export competitiveness purely in terms of exchange rates. It is a wrong notion that the devaluation of currencies willbenefit exporters in south-east Asian countries. The entire financial system has collapsed there...," Ahluwalia said. "The movement in real effective exchange rate (REER) is only one of the aspects of competitiveness. In the medium-term, export growth does not hinge on the exchange rate. Increase in productivity can to some extent solve the problem. Some competitive pressure is good for business," the finance secretary told exporters. Industry interpreted the finance secretary's statement as a signal that the rupee will not be allowed to depreciate beyond the present level of 38.50 to 38.90 against the dollar. Exporters have been lobbying to depreciate the rupee to Rs 40-42 against the dollar.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
