Perspective: India’s Forex Reserves Hit Record High | 20 June, 2024

Summary

In this episode of Sunset TV's 'Perspective,' host Tinaa discusses India's foreign exchange reserves, which recently reached a record high of over $655 billion. The conversation delves into the significance of these reserves for economic safety and liquidity, with insights from Professor Charan Singh and Professor Manoj Pant. They explain the purpose of reserves, the impact of currency valuation on reserve size, and the Reserve Bank of India's role in managing the rupee's exchange rate to support exports and maintain economic stability.

Takeaways

• 📈 India's foreign exchange reserves reached a new lifetime high of over $655 billion during the week ending June 7th, 2024.
• 🏦 The largest component of Forex reserves, Foreign Currency Assets (FCA), increased by $3.77 billion to $57,633 billion.
• 📊 Gold reserves in India rose by $481 million to $56.98 billion, contributing to the overall increase in reserves.
• 💰 Special Drawing Rights (SDRs) and India's reserve position with the IMF also saw increases, by $43 million and $10 million, respectively.
• 💡 The significance of foreign exchange reserves lies in their role as a 'safety wall' for a country's economy, providing a buffer against economic shocks.
• 🌐 The primary purpose of Forex reserves is safety, ensuring a country can cover its import needs even if the export market dries up.
• 📉 Historically, India's Forex reserves suffered a severe jolt in 1991, leading to a focus on maintaining at least 12 months of import cover.
• 🔄 The composition of Forex reserves can include various currencies and assets, depending on trade patterns and international transactions.
• 🌍 The international market views a country's Forex reserves as an indicator of its economic health and stability.
• 🤔 There is a tradeoff between maintaining a high level of reserves for safety and the costs associated with not deploying these assets for returns.
• 🛑 The RBI intervenes in the foreign exchange market to manage the volatility of the rupee against other currencies, aiming to prevent sharp fluctuations that could impact exports and imports.

Q & A

What is the significance of India's foreign exchange reserves reaching a new lifetime high?

India's foreign exchange reserves reaching a new lifetime high signifies the country's economic strength, safety, and liquidity, which can be used to support the economy during times of crisis and also to stabilize the currency in the international market.

What are the main components of India's foreign exchange reserves?

The main components of India's foreign exchange reserves include foreign currency assets, gold reserves, special drawing rights (SDRs), and India's reserve position with the IMF.

Why are foreign exchange reserves important for a country's economy?

Foreign exchange reserves are important for a country's economy as they serve as a safety wall, providing liquidity to meet essential imports and payments in foreign currencies, and also to stabilize the exchange rate.

How did the 1991 economic crisis impact India's approach to foreign exchange reserves?

The 1991 economic crisis, which left India with only 14 days of import cover, led to a significant shift in policy. Since then, India has been building its reserves to ensure at least 12 months of import cover for economic safety and stability.

What is the role of the Reserve Bank of India (RBI) in managing the country's foreign exchange reserves?

The RBI is responsible for managing the country's foreign exchange reserves, ensuring safety and liquidity, intervening in the foreign exchange market to stabilize the rupee's value, and maintaining an appropriate level of reserves for economic stability.

Why do countries with their own reserve currencies, like the US, still maintain foreign exchange reserves?

Even countries with reserve currencies like the US maintain foreign exchange reserves for intervention purposes in their markets to control volatility and ensure stability in the foreign exchange market.

What is the impact of a country's foreign exchange reserves on its international image?

A country's foreign exchange reserves can positively impact its international image by demonstrating its economic strength and ability to meet international obligations, thus attracting trade and investment.

How does the valuation of foreign exchange reserves affect the reported amount?

The valuation of foreign exchange reserves can affect the reported amount due to changes in the value of the underlying currencies and assets. For example, if the dollar strengthens against other currencies, the reserves may appear to increase in value even without any new inflows.

What is the concept of 'import cover' in the context of foreign exchange reserves?

Import cover refers to the number of months a country's foreign exchange reserves can cover its imports. It is an indicator of the country's ability to pay for essential imports in the event of a sudden stop in export earnings.

Why might a country intervene in the foreign exchange market to manage its currency's value?

A country might intervene in the foreign exchange market to manage its currency's value to prevent excessive volatility, which can disrupt economic planning and trade, and to maintain a competitive exchange rate to support exports.

How does the composition of a country's foreign exchange reserves reflect its trade patterns?

The composition of a country's foreign exchange reserves typically reflects its trade patterns, with a predominance of currencies from its major trading partners, ensuring the country has the necessary foreign currencies to conduct international transactions.

Outlines

00:00

📈 India's Foreign Exchange Reserves Reach Record High

The video script begins with an introduction to the topic of India's foreign exchange reserves, which have recently reached a new lifetime high of over $655 billion. The discussion focuses on the significance of this increase and its implications for India's economy. The show's host, Tinaa, welcomes two distinguished guests, Professor Charan Singh and Professor Manoj Pant, to delve deeper into the subject. The conversation highlights the different components of the reserves, such as foreign currency assets, gold reserves, special drawing rights (SDRs), and the reserve position with the IMF, each of which has seen an increase.

05:00

💡 Understanding the Importance of Foreign Exchange Reserves

In this segment, Professor Charan Singh explains the concept of foreign exchange reserves and their importance for a country like India. He emphasizes that these reserves act as a safety net for the economy, providing a buffer against external shocks and ensuring the country can meet its import needs. The discussion also touches on the historical context, such as the 1991 crisis, which led to a reevaluation of India's reserve management strategy. The goal of maintaining 12 months of import cover is mentioned, and the current status of India's reserves in relation to this benchmark is discussed.

10:03

🌐 Components and Role of Foreign Exchange Reserves

Professor Manoj Pant takes over to detail the components that make up India's foreign exchange reserves and the reasons why countries maintain such reserves. He clarifies that reserves are necessary for countries whose currencies are not accepted internationally for transactions. The role of reserves in ensuring the country can make payments in foreign currencies is highlighted, along with the purpose of maintaining the stability of the exchange rate. The segment also addresses the balance between safety, liquidity, and returns on reserves.

15:05

🔑 The Cost of Maintaining High Foreign Exchange Reserves

The conversation continues with an exploration of the costs associated with maintaining high levels of foreign exchange reserves. It is mentioned that while safety is a priority, there is a trade-off between the cost of holding reserves and the benefits they provide. The discussion points out that having excessive reserves can incur costs if the assets are not invested wisely, and the importance of striking a balance between having enough reserves for safety and not so much that it incurs unnecessary costs is emphasized.

20:06

🛣️ RBI's Intervention in the Foreign Exchange Market

This part of the script discusses the role of the Reserve Bank of India (RBI) in intervening in the foreign exchange market to manage the value of the rupee. The purpose of these interventions is to prevent sharp fluctuations in the exchange rate, which can impact trade and the economy. The speakers explain that a stable exchange rate is crucial for planning investments and exports, and that the RBI's actions aim to maintain this stability within a certain range.

25:07

🏦 International Implications and Reserve Management

The final paragraph delves into the international implications of a country's foreign exchange reserves and how they are managed. It touches on the guidelines provided by international organizations like the IMF and WTO regarding currency manipulation and the maintenance of reserves. The segment also highlights the importance of a diversified portfolio of foreign currency assets, which depends on a country's trade patterns and economic relationships.

📚 Conclusion and Invitation to Learn More

The script concludes with a summary of the insights provided by the two professors on the topic of foreign exchange reserves. The host expresses gratitude for the informative discussion and emphasizes the significance of understanding this complex subject. Viewers are encouraged to continue learning about the topic by watching more programs on Sunset TV and subscribing to their YouTube channel.

Keywords

💡Foreign Exchange Reserves

Foreign Exchange Reserves refer to the assets held by a country's central bank in foreign currencies. They serve as a safety net for the economy, ensuring that there are enough funds to cover imports and to stabilize the currency. In the video, it is mentioned that India's reserves have reached a new high, reflecting the health of the Indian economy and its ability to manage international transactions and potential economic shocks.

💡Forex Kitty

The term 'Forex Kitty' is colloquially used to describe a country's foreign exchange reserves. It is significant as it indicates the financial strength and stability of a nation. In the script, the increase in India's Forex Kitty is discussed as a positive sign of the country's economic health and its capacity to support its currency and meet import needs.

💡Foreign Currency Assets (FCA)

Foreign Currency Assets are a major component of a country's foreign exchange reserves, consisting of foreign-currency-denominated, highly liquid assets such as bank deposits, treasury bills, and government securities. In the context of the video, India's FCA saw an increase, which is a significant contributor to the overall rise in foreign exchange reserves.

💡Gold Reserves

Gold Reserves are part of a country's foreign exchange reserves and are held as a store of value. They can be liquidated to support the currency or finance imports. The script mentions that India's gold reserves increased, which is a component of the overall foreign exchange reserves and contributes to the country's economic stability.

💡Special Drawing Rights (SDRs)

Special Drawing Rights are an international reserve asset created by the International Monetary Fund (IMF) to supplement member countries' official reserves. In the video, it is noted that India's SDRs increased, which is part of the broader foreign exchange reserves and can be used to support the country's financial stability and facilitate international transactions.

💡Reserve Position with the IMF

A country's Reserve Position with the IMF refers to its total assets in the IMF, which can be used to finance its balance of payments or to obtain foreign currency. The script indicates that India's reserve position with the IMF also increased, which is a positive sign of the country's ability to engage in international financial activities.

💡Import Cover

Import Cover is a measure of the number of months of imports a country can pay for with its foreign exchange reserves. It is an indicator of the sufficiency of a country's reserves to meet its short-term external obligations. The video discusses the importance of maintaining a certain level of import cover, with India aiming for 12 months, to ensure economic safety.

💡Economic Safety

Economic Safety refers to the ability of a country to withstand financial crises or economic shocks without severe disruption to its economy. In the script, the buildup of foreign exchange reserves is highlighted as a means to ensure economic safety, especially in the aftermath of the 1991 crisis when India had only 14 days of import cover.

💡Liquidity

In the context of foreign exchange reserves, liquidity refers to the ability to quickly convert assets into cash or other forms of readily available funds. The script emphasizes the importance of reserves having high liquidity, allowing a country to meet its financial obligations swiftly and efficiently.

💡Returns on Reserves

Returns on Reserves pertain to the interest or profits earned from investing a country's foreign exchange reserves. While safety and liquidity are the primary purposes, the video mentions that some countries, like Singapore, have used their reserves to generate returns through sovereign wealth funds, although India has been more cautious in this regard.

💡Intervention in Foreign Exchange Market

Intervention in the Foreign Exchange Market refers to actions taken by a country's central bank to influence the exchange rate of its currency by buying or selling foreign currency. The video discusses how the RBI intervenes to maintain the stability of the rupee against other currencies, which is crucial for managing the country's foreign exchange reserves and economic policy.

Highlights

India's foreign exchange reserves reached a new lifetime high of over $655 billion during the week ended June 7th.

The largest component of Forex reserves, Foreign Currency Assets (FCA), increased by $3.77 billion to $576.33 billion.

Gold reserves in India rose by $481 million to $56.98 billion.

Special Drawing Rights (SDRs) increased by $43 million to $18.16 billion.

India's Reserve Position with the IMF also increased by $10 million to $4.336 billion.

The rise in foreign exchange reserves is significant for the safety and liquidity of the Indian economy.

Foreign exchange reserves act as a safety wall for a country's economy and can be used for returns.

India's focus on building reserves stems from the 1991 economic crisis when it had only 14 days of import cover.

India's current import cover stands at 11 months, which is considered very healthy.

The composition of foreign exchange reserves includes foreign currency assets, gold, SDRs, and the reserve position with the IMF.

Countries with currencies not automatically accepted for international transactions need to maintain reserves.

The RBI intervenes in the foreign exchange market to maintain the stability of the rupee-dollar exchange rate.

A strong rupee can negatively impact exports by making them more expensive in the international market.

Maintaining a balance in foreign exchange reserves is crucial for a country's international standing and economic stability.

Higher reserves can indicate a country's strength to pay for imports and influence its international image.

China's large foreign exchange reserves have allowed it to pose as an international currency contender.

The composition of a country's foreign exchange reserves is kept secret to prevent market speculation.

Intervention in currency valuation to promote exports can be considered a trade restrictive practice by the WTO.

Transcripts

[Music]

namaskar viewers hello and welcome to

Sunset TV I am tinaa you're watching

perspective on the show today we're

going to talk about India's foreign

exchange reserves we jumped over 4

billion dollar to touch a new lifetime

high of more than $655 billion during

the week that ended 7th of June now as

per data released by The Reserve Bank of

India India's foreign currency assets

the FCA which formed the biggest

component of the Forex reserves Rose by

$3.77 3 billion to

57633 7 billion in the reported week

gold reserves Rose by $481 million to

56.98 billion the special drawing rights

which are called the sdrs were up $43

million to

$18.16 billion and India's Reserve

position with the IMF was also up $10

million to $ 4.33 6 billion in the

reporting week so how significant is

this rise in foreign exchange reserves

what do the increasing numbers in

India's Forex Kitty reflect about the

health of the Indian economy we'll talk

about this and much more in perspective

today with two distinguished guests who

join us on the program so let me first

introduce them to you delighted to have

with us Professor Charan singhh CEO egro

Foundation Professor Singh glad to have

you with us on the program today and

Professor Manoj pant former Vice

Chancellor Indian Institute of foreign

trade Professor pun pleasure to have you

with us on this edition of perspective

you know Foreign Exchange Reserve is not

a topic that we discuss with as much

prominence every day so and since we

have two professors joining us on the

program today let's begin by

understanding what really Forex Reserve

is how significant it is for a country

like India uh Professor Singh the first

question to you sir help us and our

viewers understand what are foreign

exchange reserves what is the purpose of

having such a reserve especially for a

country like India so firstly I must

mention this is a very important topic

and very timely to be discussing this

issue foreign exchange reserves actually

are sort of safety wall for any country

they serve their liquid assets and they

are used for safety of the economy and

they can also be used for some returns

in different parts of the world foreign

exchange reserves have been used very

differently for example in Singapore

theyve been mainly used as Sovereign

wealth funds and they're looking for

returns in our country that's not been

the case lots of work has been done I

myself written different set of Articles

at different points or what do foreign

exchange reserves really serve the

purpose for in our country the most

important function it serves is safety

so we are very careful as to what are

foreign exchange reserves are and why

did this happen why are we so

careful all started with the 1991 crisis

right in 1991 we were left with only 14

days of import cover what import cover

means I am importing as a country lots

of things every year do I have forign ex

change reserves to buy those Imports

suppose the export Market dries up can I

still buy those essential Imports of

food fuel now in

1991 with Russia coming up and there's a

breakdown there Middle East war was

there India's Foreign Exchange Reserve

suffered a severe jolt because

remittances sto we were only having 14

days of import since then the high level

committee on balance of payments chaired

by Dr C rangarajan and Dr yv R Who later

became the governor recommended we

should have at least 12 months of import

cover India has been very very fortunate

that all through that time from 93

onwards we started building our reserves

and we continued to have a import cover

of more than 12 months the in that Peak

we touched 17 months the figure that you

just just quoted we are still at 11

months of import cover just reported in

the uh speech by the governor of RBI

which is very V so the safety is the

most important thing along with safety

comes liquidity am I able to convert

those reserves into liquid assets as I

want and then returns is the last in our

case in this case I must mention one

speech given by Dr V

long time ago I think in 2008 where he

said when we are running such current

account

deficits building foreign exchange

reserves is a herculan task but we have

to maintain it we have to maintain it

from the angle of safety and liquidity

but we are not going to changee returns

out of it because we are doing this

saving from the deficit and the good

news is the good news is Professor that

this number has been on the rise for

quite some time now uh Professor pun to

you now you know even though I did put

out a few numbers that we got from the

RBI document talking about the different

components and the increase that they

have seen but it would be helpful for us

and our viewers if you could explain the

key components that form the Foreign

Exchange Reserve in

India well uh it's very simple there are

the foreign currency assets and they are

composed let me first go back a little

bit easier to understand and just to few

more things to what was mentioned by the

earlier speaker see why do countries

have Reserves at all do all countries

have reserves that's not true reserves

are only required by those countries

whose currency is not automatically

accepted as a means of payment

International transaction okay for

example if you buy oil in the World

Market we cannot pay in rupees we have

to pay in

dollars so it's required as a reserve

mainly for those countries who are not

those whose currencies are acceptable

ordinarily as a means of Exchange in

world markets for any transacts so

Germany doesn't need to keep reserves

technically the USA does not need

reserves the UK does not need reserves

because they have pounds and they have

to make payments they can always print

their pounds and send them so we need we

have a second problem apart from the

safety issue we have a problem that we

need to make payments in foreign

currency

which we do not have which you do not

normally have now if your trade is

always in Surplus that mean you

exporting more than you're earning then

you will always have an inflow of

dollars or some fign C which would pay

for our transaction that's not true

India generally had a deficit in trade

bance so we need to keep foreign

currency in our reserves to pay for

those bance that's really what it is

very simple if you buy something you got

to pay for it how will you pay the way

we pay through the whatever we have in

our foreign culture res that's simple

way of understanding now as the previous

speaker mentioned the it is felt that

you should have 12 months Imports worth

in your reserves so that you won't run

out of payment possibilities in the

World Market that is as far as holding

reserves is concerned now what is safe

there is no answer on this is it 12

months is it 10 months it is 9 months we

are maintaining 12 months but where we

are today we have in a different

situation we are not building Reserve

only for the purpose of safety into uh

in paying transactions we also building

reserves because sometimes the RBI sells

dollars or buys up dollars simply to

make sure that the rupe exchange rate

does not go herewhere we also maintain

the rupe dollar rate at a certain rate

so sometimes the buying and selling of a

foreign exchange which could be dollars

or some other currencies done in order

to keep the rate at which rupe can be

exchanged for dollars and vice versa

fixed in a certain band so two purposes

one to make sure we never run out of

reserves when we have to make a payment

the rupee is not accepted as means of

payment and second to make sure that the

rupe and dollar rate remains in the

certain range which the RBI tries to fix

so these two determines the reasons why

the reserves are

kept okay uh Professor Singh I'll go

back to you and try and understand uh

what is the significant amount am that

should be good enough for a country like

India currently our numbers have been a

lifetime High what the RBI has achieved

is certainly orur well and also if you

could help us understand what it means

in the international market so for a

country to have a huge amount of uh

Reserve how does the International

Market or what is the image of the

country in the international market if I

put it like

that absolutely I think very well uh

very well put the question questions the

international rating of the

country is also dependent on the

reserves it has according to the high

level committee on balance of payments

which I just mentioned in my previous

intervention they had mentioned 12

months of import cover until then the

wisdom in the world was 3 months of

import cover is sufficient Asian crisis

took place in 1997 98 and you know the

Asian tigers were really washed out had

they had those enough import cover or

foreign exchange reserves probably they

would not have met that fate Argentina

was in a big crisis by

1999 when Argentina went into crisis

Alan Greenspan and GTI the Finance

Minister of Argentina they came out with

a formula after lots of sweating and

lots of hard work and lots of research

and they said wow the safest import

cover should be for 12 months so

therefore if you ask a question

now the any Economist who has been

working on Foreign Exchange reserves

would tell you that 12 months of import

cover is the safest now the question is

there are multilateral agencies like the

IMF what are they there for if a country

is getting into a crisis that's exactly

what they're meant for to give you

support and to give you Aid immediately

provide you with foreign exchange

reserves when required so now despite

that umbrella that the IMF is expected

to provide you saw what happened just a

few months back in Sri Lanka so

therefore the Prudence is that one

country especially a country like India

which is is not having a surplus current

account def Surplus current account

should maintain about a 12 month import

C now when you say that we are on a

record high of course we are on a record

high when we compute it in terms of

amount but when you compare it with an

indicator and right indicator for this

is the Imports we are around 11 months

which is very very good but as I

mentioned to you at one point we were 17

months now now keeping an import cover

of that high also has a cost because the

components of Foreign Exchange reserves

are foreign currency assets right now if

those foreign currency assets are not

deployed somewhere and they're just kept

in the for the sake of liquidity and

safety there are cost to the ex cheer so

therefore the Prudence is that we

maintain it we should not have over

Surplus and we don't earn any interest

on it and we should not have too low

that in case there is a crisis we do not

meet we do not reach the same position

as that happened in 19 Professor does

that mean that higher the reserves

higher will be the cost that the country

will have to bear no not yes there's a

tradeoff there's a tradeoff the tradeoff

is between cost and

safety the wisdom is especially after

the high level Committee of rangarajan

and RI in our country all the governors

have stuck to that wisdom the wisdom is

keep about one year of import cover but

if you have above it then there's an

additional cost and therefore most of

the governors will try to keep it in the

range of 11 months to 13 months now

Professor pun was very right countries

like the US and UK which is a reserve

currency they don't need to keep

reserves America doesn't keep foreign

exchange reserves the foreign exchange

reserves that are required for

intervention to control the volatility

in the market Foreign Exchange Market is

also there but those volumes are very

very small to that extent these

countries though they claim their Flo

floating exchange rates they also

maintain reserves you'll be surprised

even Germany maintains reserve and that

is for intervention purposes in their

markets now most of these countries will

tell you that they have a floating

exchange rate but you'll be surprised

there's a study done at

with professor rof and rehard who said

most of these countries who claim they

have a floating exchange rate generally

do not have a floating exchange rate

they intervene in the market and to

intervene in the market they need

Reserve so Professor pun is very right

that you need the reserve for even

intervention okay Professor P you wanted

to make a point on the cost Factor sir

yeah it seems like

this again as was said by speaker that

you know we

you know whether it's 11 month or 12

month these are all matters of you know

estimates there's no other way you can

do this in this market now very often

our reserves change not because we have

actually got an inflow of

Furnishing but simply because there's a

valuation change you know sometimes you

know there's also how do you value when

I say my reserves are $600 billion how

did I value it it is not as if you have

600 billion of dollar notes in your

country sometimes times when the

Dollar's value goes up or the rupees

value goes down your reserves tend to

escalate by what is called the valuation

sometimes valuation itself may lead to

an increase reserves sometimes because

of inflow of reserves and sometimes it's

because the RBI has intervened to make

sure that the rupee dollar rate does not

become out of out of seat now which

which is the purpose for which RBI does

it is never known it's not supposed to

be known then people will start

speculating on the Foreign Exchange

Market but I personally believe at the

moment intervention The the Reserve you

see changing is not because we suddenly

started exporting more which is not true

because we still have a deficit or

because we are worried about something

else but mainly because the dollar the

the RBI is making sure that the rupe

dollar rate neither goes up too much nor

goes down so they periodically intervene

to make sure that the rupe dollar rup

rate remains around the 3 rupees per

dollar rate so if if suddenly you find

that the market is such it's showing

that the Rupees is now going up to let's

say 85 or 86 the RBI will quickly step

in and release dollars to bring down the

rate and you'll see this coming up in

the RBI account so it's difficult to say

how much of it they are doing because

they want to prevent uh you know the

rupe dollar it from changing and how

much they're doing because they're

trying to build up reserves from the

security aspect as mentioned very to say

actually you should not be able to know

this if you know this then people start

speculating my own if I may ask

Professor P related question the fact

that the RBI has to intervene and ensure

that the value of the rupee does not go

up sharply if I may ask from Layman's

perspective isn't it good that the value

of rupee goes up why why why is it

important for the RBI to intervene what

happens if if the value of the rupe goes

up sharply if you could help us explain

from the Traders Point of View you want

to export right if your rupe become

let's say 40 rupees per dollar that mean

the dollar price of everything that

you're sending has gone up your export

will fall so you don't want right now

the rupe to go to 440 rupees or dollar

as compared to 83 because then

everything valued in dollars the dollar

price of every commodity goes up right

suppose something cost 100 rupees or

let's say 80 rupees right it'll cost $1

in the F Market if you let your rupe for

whatever reason or force it to go up to

40 rupees then every 80 rupe will cost

$2 so the prices for the buyers that is

prices for the exporters have gone up

and your exports have fall so the idea

is to maintain a balance to make sure

that exporters are not hurt so a rising

rupe will sound very good nationally

will sound very emotionally very nice it

may be a very bad thing from the export

point of okay uh Singh so so the fact

that there are multiple benefits of

having a foreign Exchange Reserve uh

which which are the countries which do

maintain such a reserve and in India we

we often refer to the Foreign Exchange

Reserve as the health meter of an of the

economy so help us understand which are

the countries which do maintain this

reserve and and whether it is the right

indicator to measure the health of any

economy it's I don't

think okay sorry go ahead go ahead go

ahead I'll come back to you Prof let let

me let me go back uh step and explain

you know I've worked in the Reserve Bank

for about 25 years and uh have been

associated with foreign exchange

reserves and you might probably see one

of my papers in APW which is still

quoted The Reserve Bank is very very

clear I stated many many times that they

do not changee an exchange rate they

change they are worried about the

volatility in the exchange rate so

whenever is Bank intervenes it

intervenes to contain the volatility now

your question if there is a huge

volatility then what happens to the

economy that is where I think Professor

pun has given the right absolutely

correct explanation that suppose I am

buying something at at 80 rupees today

and the price Falls to 40 rupees

tomorrow and day after Rises to 120 how

do I plan my investment how do I plan my

production how do I plan my supply all

that is very confusing that is one of

the reasons why many countries still say

that we would like to have a fixed

exchange rate so at least there is

stability in the exchange but fixed

exchange rate has its own demands and

most of the countries do not in the

world want to have it so floating

exchange rate was the vi media in the

floating exchange rate while you are not

chasing the rate you are chasing the

volatility the ality is within a day

within a week within a month within two

three months price fluctuates just as an

illustration you know what happens to

the prices of Bitcoin and the whole

world is worried about it similarly to

contain that volatility in the exchange

rate The Reserve Bank intervenes for

that matter as I mentioned Harvard

professor rof and rainhard both of them

wrote a beautiful paper saying most

countries say that they are purely

floating they don't intervene but all of

them intervene now that comes to your

question when you say how many countries

keep reserves if most of the countries

are intervening in the Foreign Exchange

Market they will keep

reserves right right now which of the

country may not be very keen to keep

reserves those are the reserve currency

US dollar to some extent uh Euro uh but

please remember euro is the common

currency

but when Germany is exporting and

importing Germany has to now pay for it

now that also brings me to a very good

question which we ignored you asked what

are the components of foreign currency

assets if I'm dealing in Commodities

which are produced in advanced countries

then I have to pay them in those

currencies so the composition of foreign

exchange foreign currency assets will be

generally some pound sterling some euros

some Japanese Yen some US Dollars some

Canadian dollars depending on with whom

I'ma trading and what is the volume of

my trading so I think foreign exchange

reserves also helps

globally intervention but it also helps

International rating agencies to know

that you have the strength to pay for

your Imports now does it help yes it

does help that is why countries like

like China at one point of Time Out of1

trillion of Foreign Exchange reserves

was holding 4 trillion dollar that gave

China the strength then an obvious

question is why did China do it China

did it by as the wisdom goes of that

point of time that I was referring to

from 2009 to 2012 they were and their

currency manipulation had started much

earlier so when Professor pun said do I

need a strong foreign exchange rate it

may impact my exports on the contrary

what China did it made its exchange rate

rather

depreciate deliberately and kept it at a

low rate so it could accumulate huge

amount of export earnings with the

Surplus on their current account and

that is why they had such a high foreign

exchange reserves was it needed at that

point of time they felt it is needed

because when they were growing they felt

to contain the dollar they needed it now

just imagine when they have such huge

Reserve they want to now become an

international currency and they are

saying that we can intervene in the

global markets we can influence US

Dollars we can also provide you in case

you need support in any currency so

therefore now they are posing themselves

to serve as an international reserves of

course it's not going to happen that

fast and they will not turn out to be an

international Reserve currency but the

point I'm trying to drive at is the

portfolio of Foreign Exchange reserves

will generally be Diversified depending

on your trade pattern and most of these

countries will have US dollar domination

in their foreign exchang but but

Professor do we do we have uh uh any

guidelines uh from the IMF on Foreign

Exchange Reserve management since it's

being done by a lot of countries not

really but we do have some guidelines

now in the WTO you know as the speaker

was mentioning profess mentioning you

know China was driving its uh its yen to

a very low strength right that mean

driving it down against the dollar to

promote his exports now today if if

there's intervent if there's evidence

that you're using intervention in order

to keep your currency artificially low

to promote exports that can be ConEd a

pre a trade restrictive practice in the

WTO and you can take retaliation against

a country which is trying to keep his

currency too low so idea is only every

country agrees that they you know R by

the way

International you know Banks always talk

to each other also idea is keep it

within the flex the exchange it

fluctuation should be within a band

normally is 2 to 3% maybe maximum 5%

internationally if you let your currency

go out beyond the band for very long

time in either direction it can be

considered evidence of manipulation of

currency to promote exports or Imports

either way and that case that can be

considered restrictive practice in the

WTO so the idea is keep don't let your

currency be be determined by normal

trade transactions don't try to push

exports beyond what is natural or uh

keep Imports away beyond what is natural

that's why the checks and balances will

have to be required so one thing

remember the reserves composition is a

secret of the RB it has to be if I know

the composition reserves and the RBI

keeps the formula I can start

speculating on within currencies so that

is always a formula which is kept secret

sure sure

Prof right very very very engaging 30

minutes with the two professors on

understanding what really Foreign

Exchange Reserve is the purpose the

challenges also uh because of the

fluctuations in the markets which impact

but uh uh it's it's been very

enlightening 30 minutes discussing all

of these aspects relating to the Foreign

Exchange Reserve and how significant uh

the rising numbers are for India as a

country because they also help attract

trade and and maintain that image of the

country in the international market

thank you once again to both our guests

for joining us on this edition of

perspective and helping us understand

all about this very very uh difficult

topic so and thank you very much to you

viewers for your time as well I'll see

you same time tomorrow now take good

care of yourselves and keep watching

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