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May 11, 2002 | 1200 IST
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Reddy for national balance sheet tack on forex policy

BS Economy Bureau

Reserve Bank of India Deputy Governor Y V Reddy today proposed the concept of a national balance sheet approach to provide guidance on policy relating to foreign exchange reserves.

Addressing a special lecture on India's foreign exchange reserves: policy, status and issues organised by the National Council of Applied Economic Research on Friday, Reddy said, in emerging economies large net borrowings by some entities tend to increase the country risk premiums and thus raise the borrowing cost.

According to Reddy, the national balance sheet would address the question whether and how the official sector should take account of the maturity and currency mismatches of the private sector in structuring its foreign assets and liabilities.

Stressing that stability was the key factor in the apex bank's policy on maintaining adequate forex reserves, Reddy said, the exchange rate policy harmonised with interest rates has enabled India to grow in the last decade.

Justifying India's cautious approach of opting for a managed float, Reddy said, "Even Alan Greenspan says that no government is indifferent to exchange rates," he said.

Reddy also said the idea of maintaining reserves in the form of "global greenbacks" and not just dollars was worth deliberating.

The amount of this new form of global money could be given to developing countries to finance their development programmes and global public goods like environment projects, health initiatives, etc, he said.

He said a minimum two-fold increase in annual capital flows was imperative for financing the 2.8 per cent current account deficit as projected by the Planning Commission for the 10th Plan period.

He also said it was high time for further exploring 'national liquidity', considering the liquidity problems of developing countries.

"Net capital flows will have to increase from about $ 10 billion in the initial year of the 10th Plan to about $40 billion in the terminal year or an average of $20 billion per annum during the 10th Plan," he said.

To mobilise funds of this order, international investor confidence was vital, Reddy said, adding "policy coordination has to be put in place to synchronise the sustainable current account deficit with sustainable economic growth and maintain adequate forex reserves".

Pointing out at the changed scenario in the last 12 years, he said, "The period 1990-2002 has been a journey from agony to comfort in matters relating to forex reserves." At present, the foreign exchange reserves stand at over $55 billion as compared with $5.8 billion dollar in 1991," he said.

Geopolitical factors gave different levels of comfort of ready availability of forex resources from official sector through bilateral or multilateral channels, he said.

"India has to constantly make and review its assessment of such access, noting that adequacy of forex reserves, needs to be assessed with reference to changing perceptions of the economy in the market place as well as among governments or the official sector," he added.

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