“RBI has done a good job in increasing the reserves. We aren’t having problems like Sri Lanka and Pakistan.” ANI reported Raghuram Rajan’s sayings.
India has enough foreign exchange reserves and has few international loans. The RBI is raising interest rates, which will contribute to a decrease in inflation. Food and gasoline prices are the most inflated. Food-related inflation is declining globally and will do so in India as well. According to the RBI, the policy repo rate has increased by 90 basis points, or 0.90 percent, since the start of the current fiscal year. PTI reported the “Colombo Consumer Price Index” on India, which shows that the annual inflation reached 60.8% in July.
In addition to Sri Lanka, Pakistan is also at risk of becoming bankrupt due to growing inflation and dwindling foreign currency reserves. According to the UNDP, Pakistan has more than USD 250 billion in debt.
The central bank spiked the policy repo rate by 0.40 percent, or 40 basis points, to 4.4 percent as part of its off-cycle monetary policy review. The policy repo rate has not increased in over two years prior to this. Because of lower prices for crude and edible oils, India’s retail inflation decreased to 7.01 percent in June from 7.04 percent the previous month, according to NSO.
India has an external debt balance of $620.7 billion as of the end of March 2022. For the week ending July 22, India’s foreign exchange (forex) reserves were $571.56 billion, according to the most recent figures from the RBI. From 21.2 percent at the end of March 2021, the external debt to GDP ratio decreased to 19.9 percent at the end of March 2022.
Raghuram Rajan’s reaction to RBI interventions shows a big picture on forex because this reserve is important in strengthening any country amid a crisis.
The trade of several national currencies or units of account is known as foreign exchange. It is significant because the exchange rate, or the cost of one currency in terms of another, influences a country’s economic health and, in turn, the welfare of all its citizens. Forex is simply assets that the central bank holds as a reserve in foreign currencies. They frequently support the currency rate and have an impact on monetary policy. In the case of India, the foreign exchange reserves consist of dollars, gold, and a certain amount of SDRs from the IMF. The majority of the reserves are often stored in US dollars due to the currency’s significance in the global financial and trading system.
Since US dollars are used to settle all foreign transactions, they are required to fund our imports. More crucially, they are required to promote and uphold trust in central bank actions, including monetary policy decisions and any exchange rate interventions that support the domestic currency. Additionally, it lessens any vulnerability brought on by a crisis-related unexpected interruption of foreign capital flows. Thus, keeping liquid foreign exchange on hand offers protection from such consequences and the assurance against an external shock. Presently, India still has sufficient foreign exchange for covering the nation’s essential imports.