Former Reserve Bank of India Governor, D Subbarao said on Wednesday that a strong foreign exchange reserve in India will not insulate it from any global shocks, rather it will help manage them.
He was speaking at a webinar organised by Crisil Ratings. The former governor of RBI said that there is a misinformed view in India that since the country has a strong foreign exchange reserves, it is insulated from global shocks.
“We are not insulated from the global shocks. The global shocks will still be felt here. Our foreign exchange reserves will help us manage those shocks. So, the foreign exchange reserves do not protect us from the buildup of pressure, they protect us in managing the pressure,” Subbarao said.
The country’s foreign exchange reserves stood at USD 637.477 billion as on October 1, 2021.
He further explained that whenever any monetary policy normalisation happens in advanced economies, which will lead to large capital outflows, the RBI can manage exchange rate volatility through intervention in the foreign exchange market.
“When the Fed (The Federal Reserve) normalises, I think the RBI will have to intervene in the foreign exchange market to manage volatility. I don’t think they should use the monetary policy instrument unless there is very strong pressure, which I don’t expect,” Subbarao said.
The good news is that, as shared by Subbarao, compared to 2013, when a similar monetary policy normalisation by advanced economies had taken place, India, today, is well placed to deal with any external shock.
