Monday, August 19, 2013

Kaushik Basu: Use forex reserves to curb rupee volatility - The Hindu

With the rupee sliding below the 63 mark against US dollar, World Bank Chief Economist Kaushik Basu on Monday said India should use forex reserves to curb volatility in the currency market and not to look to IMF for funds.

"To use certain amount of your forex to buy and sell dollar I think (is) a good idea...(It) gives out signal that reserve has a purpose. That is broadly the direction we should go and use reserves to curb turbulence", he said while delivering the 16th JRD Tata Memorial Lecture here.

Mr. Basu, who was Chief Economic Adviser in the Finance Ministry before taking over his assignment with the World Bank, said the government should not "overreact" to depreciation of rupee.

Continuing its free fall, the rupee today breached the 63-mark to end at an all time low of 63.13, recording the decade's worst single-day fall of 148 paise, heightening fears that more capital control steps could be in the offing.

"There was a sudden depreciation in exchange rate but we must not overreact to that. We do need steps to correct it. The certain amount of buying and selling of foreign exchange is the technique that is done in floating exchange rate market...that method could be strategic intervention," he said.

On the possibility of India approaching the International Monetary Fund (IMF) for money, Mr. Basu said: "I don't think we are in a situation where there is any need for that. India has enough foreign exchange reserve. So, the question of having to turn to IMF is not there."

India has a foreign exchange reserve of about USD 280 billion.

Mr. Basu dismissed the suggestion that India was facing the same problems as it witnessed in 1991 when the country's forex reserves dipped to a meagre USD 3 billion.

"Are we back to 1991? That is completely a non-question because if you just look at a couple of numbers, then you say there is absolutely no comparison. Foreign exchange reserves in 1991 was down to USD 3 billion, India now sits on USD 280 billion foreign exchange reserve," he said.

Pointing out that India's economic growth rate slipped to 5 per cent in 2012-13, he said, "that's a very poor performance. However, in 1991, the growth was much lower than 5 per cent".

Recently, Prime Minister Manmohan Singh too had ruled out the possibility of India witnessing a repeat of the 1991 balance of payments crisis and reversing the economic liberalisation programme.

Referring to the tenure of RBI Governor D Subbarao, Basu said, he successfully upheld "dignity, honour and autonomy" of the Reserve Bank. "I like to believe that...there will absolutely no disagreement between PM and Dr Subbarao", he added.

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