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Economic Survey 2022 : India's external sector ready to face expected drying up of global liquidity

Central Banks globally are expected to begin tightening their monetary policy and reduce liquidity in a bid to curtail rising inflation. In FY22, India became the fourth-largest forex reserves holder, after China, Japan, and Switzerland with a record $636 billion. However, India’s external debt rose to $ 593.1 billion in September 2021, from $ 556.8 billion a year earlier.

January 31, 2022 / 03:00 PM IST
Union Finance Minister Nirmala Sitharaman (Illustration: Moneycontrol)

Union Finance Minister Nirmala Sitharaman (Illustration: Moneycontrol)

India’s external sector is resilient enough to face any unwinding of global liquidity, as the likelihood of faster normalization of monetary policy by systemically important central banks, including the US Federal Reserve grows, the Economic Survey 2021-22 has said.

Faster normalization of monetary policy is expected from major central banks across the world, in response to elevated inflationary pressures, said the Survey that was tabled in both houses of the Parliament on January 31.

Monetary policy normalization means monetary tightening, which is a gradual progress and signifies that central banks globally will begin to withdraw the unconventional monetary policy measures they had deployed in order to battle the economic fallout of the Covid pandemic. Mostly, this had involved loose monetary policy restrictions and a push to inject liquidity into struggling national economies.

But now that runaway inflation is fast becoming a policy challenge globally, central banks are expected to reel in the amount of extra cash in the market.