Do you think that high foreign exchange reserves of the country are a foolproof guarantee for macroeconomic stability? Comment (200 Words)
Refer - Financial Express
Enrich the answer from other sources, if the question demands.
IAS Parliament 3 years
KEY POINTS
· The ascending stock of forex reserves has led to the view this will enable the sole devotion of monetary policy to domestic objectives.
· An outstanding example is China’s battle with massive drain of foreign capital in 2016 as investors’ expectations on renminbi (RMB) value began to shift due to rising concerns about its growth outlook.
· China’s reserves depleting at an alarming rate in attempts to stem the tide, with about $1 trillion (tn).
· China resorted to capital control measures, which slowed the outflow and supported the RMB in the first half of 2017.
· India’s own historical record shows that, high or low, forex reserves didn’t prevent investors from reappraising positions, whether it was oil prices (2018) or taper fears (2013).
· RBI has been systematically suppressing bond yields, particularly the 10-year benchmark, the reference rate for banks.
· The market reading was inconsistent with RBI’s, whose rigid adherence to a particular level (6% in the case of the old, 10-year bond) was disregarded outright.
· Such large divergence can be dangerous and indefensible. If the global financial cycle were to suddenly turn, risk-aversion set in, or oil prices shoot up to risky levels.
· When the economy is open, financially integrated and subject to cross-country dynamics, it is more prudent to let market forces play out a bit than persist with a stance.
