RBI Policy: With a strong external sector, India fit to withstand war and volatility headwinds

Unlike in past global crises, India’s external sector looks stronger this time and fit to withstand the pressure of global market volatility and geopolitical tensions, said Shaktikanta Das, Governor of the Reserve Bank of India (RBI).

“We are, however, reassured by the strong buffers we have built in the past years, including foreign exchange reserves, significant improvement in external sector, and substantial strength of the financial sector,” Das said in his monetary policy statement on April 8.

The Russia-Ukraine war has triggered widespread increase in prices of commodities, including crude oil, making it tough for net importing countries such as India to keep the domestic prices under check.

Further, volatility in global capital markets has meant that foreign investors have been consistently pulling out from domestic markets, keeping the rupee under pressure. The US Federal Reserve’s intention to hike rates faster along with reduction in its balance sheet has also cast a pall over emerging market economies.

Reiterating India's fortitude, Das pointed out that the country’s forex reserves stood at $601 billion that provides an import cover of roughly 11 months. Although the reserves pile has eroded in the past few weeks as the central bank intervened in the forex market to support the rupee, reserves still remain comfortably high.

Note that forex reserves were perceived to be inadequate in 2013 when the US Federal Reserve had begun tapering its bond buying plan. At that time, India was clubbed with the group of fragile economies. India was characterised by high and unsustainable current account deficit, a weak banking system burdened by large bad loan stockpile, and an inflation situation not quite under control. The result was an incessant outflow of dollars that dragged the rupee down sharply within weeks and bond yields spiked.

Fast forward to now, India’s external sector is resilient with exports showing strong growth. Further, the current account deficit is still narrow at 2.7 percent of the gross domestic product (GDP) as of the December quarter. “Despite the sharp jump in crude oil and other commodity prices, we expect the 8 percent current account deficit to remain at sustainable levels which can be financed with normal capital flows,” the governor said.

The RBI will be ready to take any measures required to maintain orderly domestic markets and check the spillover from global markets, the governor said.