December 15, 2020

The fiscal cost of RBI’s bulging foreign exchange stash

As the COVID-19 economic crisis unfolds in India, Niranjan Rajadhyaksha explains that the country is engaged in a "complicated balancing act", where its central bank holds excess foreign exchange reserves which involve fiscal costs.

Excerpts below:

"The traditional view was that the Indian economy was constrained by a lack of foreign exchange to import fuel, food and machines needed to keep the economy on track. Economists of an earlier vintage were taught to habitually think of foreign exchange as a scarce resource. That assumption has been upended. India has not had a balance-of-payments crisis since 1991, and for most of the past two decades has been holding more foreign exchange than is required as insurance. It is akin to the government holding more food stock than is needed as a strategic reserve, an operation that imposes significant fiscal costs."
 


"Holding excess foreign exchange reserves involves fiscal costs. Sterilized intervention in effect means that RBI is replacing high- yielding Indian securities with foreign bonds that offer interest rates that are close to zero. The central bank is thus deeply engaged in a complicated balancing act, as it was in similar earlier episodes as well."

Read full article here

In : OP-EDS
x Close Window

Please verify your email address to access this content