D Subbarao: US has issue with dollar swaps as Re not fully convertible

Moneycontrol Bureau

Reserve Bank of India Governor D Subbarao believes a central bank should intervene in the forex market "only to manage economic stability disruptions". Analysts had called upon the RBI to enter the forex market and buy dollars to recoup the rupee and thus arrest the imported inflation, which is the main reason for the continued price spiral.

Stating that lending rate cuts and higher forex reserves hold keys to the market and growth recovery, a BoA-ML India report said, "The rupee will remain volatile till RBI recoups the forex reserves of USD 65 billion, including the forwards which it had sold since the 2008 global credit crisis following the fall of Lehman Brothers."

The rupee is the second worst performer among the BRICs currencies, after the Brazilian real, losing nearly 19 percent since September 2011, the report said.

Today, the RBI has extended the relaxation of the period of realization and repatriation to the country of the full value of goods or software exported by six months. The relaxation will now be effective till March 31, 2013, the RBI said in a release.

Subbarao, who had attended the G20 meeting earlier this month, believes export competitiveness must rise from productivity and not from forex rate management. "We need to have currency swap arrangements," the governor said adding, forex reserves should form first line of defense. 

Also read: RBI, govt not antagonistic to each other, says Chidambaram 

The G-20 meeting came in the backdrop of rising concern over the approaching 'fiscal cliff ' in the United States that can hit the global economy if a way is not found around the problem. Nearly USD 600 billion in spending cuts and higher taxes will start from January 1 if the US Congress does not agree to extend them, which could undermine the US and global growth.

According to Subbarao, the G20 must keep watch on global imbalances and its implication. "The Chinese FX rate polices were at the centre of the G20 debate," he told reporters. The G-20—widely looked upon as a body that can rescue the global economy after the financial crisis—has of late got bogged down in differences over various issues.

The governor, who met his US counterpart Ben Bernanke in October, said he also discussed dollar swap facility for India with the United States. He asked the Fed chairman to be "sensitive" to the impact of the US policy on India. He said the US has an issue with dollar swaps as rupee is not fully convertible. “Nations cannot be asked to desist from building forex reserves,” he opinioned. 

Earlier, the RBI had offered a swap arrangement of USD 2 billion to all SAARC (South Asian Association for Regional Cooperation) member countries to strengthen regional financial and economic ties. The swap arrangement was intended to provide a back stop line of funding for the SAARC member countries to meet any balance of payments and liquidity crises, till longer term arrangements are made. It would also help if there is a need for short-term liquidity due to market turbulence.