Reserve Bank of India (RBI) deputy governor Subir Gokarn on Thursday said it was important to ensure that companies could meet their forex obligations. From a policy perspective, he stressed that liquidity rather than cost was the issue.
“We are looking at ways to make sure the flow of foreign exchange liquidity is not hampered,” Gokarn told a TV channel. “In this context, we are clearly sensing concern globally about deleveraging, particularly by European banks, and that may be a potential threat to foreign exchange liquidity, both to Indian banks and to Indian corporates,” he observed.
Gokarn asserted that while some decisions made by corporates in terms of interest and exchange rates had turned out to be wrong, it was “critical” to ensure that they had the ability to meet obligations.
Gokarn observed that there were unhedged positions at many companies, who were clearly going to be hit by the movement in rates. “From the viewpoint of overall policy calculation, for us, it was a judgement in terms of managing medium-term risk, which is being in a situation where if the global uncertainties prolong, then we certainly don’t want to leave ourselves vulnerable in terms of meeting overall external obligations including the current account,” Gokarn said.
Gokarn added that in that sense, there is a short-term cost that some stakeholders have had to bear with, given the degree of currency depreciation. Gokarn observed that the dynamics of the rupee over the last few weeks indicated that it appeared to have reached some sort of a stable zone. While it was still volatile – given it was a market- determined currency – it was moving in a range narrower than in October, November and early December. “That gives us some indication that the measures we have introduced are helping to keep it on a sort of fundamental supply-demand process,” he said.
The deputy governor explained that with growth decelerating and the inflation momentum at least starting to ease off, RBI felt that it was appropriate, in terms of a baseline, to start talking about a peaking of the cycle. “That’s essentially the statement that the governor made in his interview, that we think we have reached the peak,” he said.
However, future action, Gokarn observed, in terms of a reversal would obviously depend on how the growth-inflation balance plays out. “Growth risks have obviously come back into much larger consideration based on what we have seen over the past few months,” the deputy governor said, adding “ I think that’s essentially what he meant, that now the equation has become a little more balanced in terms of looking at downside risk to growth vis-à-vis the upside risk to inflation.” (Financial Express)
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