FX reserves not a showpiece, must be used on a rainy day: RBI Governor Das

Reserve Bank of India (RBI) Governor Shaktikanta Das has defended the central bank's interventions to alleviate pressure on the rupee, saying foreign exchange reserves have to be used in precisely such situations to ensure there is no undue exchange rate volatility.

"There were some observations made that RBI is using reserves indiscriminately. It's not so. We picked up these reserves only for this rainy day. And when it rains, I have said this earlier also, you have to pick up your umbrella and use it," Das said in the Capital on November 12 at the Hindustan Times Leadership Summit.

"We didn't pick up reserves just to keep it as a showpiece in the Reserve Bank of India," Das added.

A surge in global commodity prices due to the Russia-Ukraine war and the spillover from the resultant synchronised tightening of monetary policy by the world's major central banks to lower multi-decade-high inflation has exerted massive pressure on most currencies, including the Indian rupee.

To check the rapid fall in the Indian currency, the RBI has sold heavily from its foreign exchange reserves. Along with a drop in valuations of certain currencies, this has led to a large fall in the reserves.

As of November 4, the reserves were $530 billion, down $111 billion compared to the same time last year.

Das said the RBI knew in 2020 and 2021 - years, when India experienced heavy inflows - that money, would flow out at some stage and be prepared for such a scenario.

"Even at this point in time, our reserves are very comfortable," he added.

Inflation Commitment

Commenting on inflation, Das said it remains a major challenge, although the RBI expects the print for October, due to be released on November 14, to fall below 7 percent from 7.41 percent in September.

As per a Moneycontrol poll of 16 economists, Consumer Price Index (CPI) inflation is seen falling to 6.7 percent in October thanks to a favourable base effect. However, it would still be well above the central bank's 6 percent upper bound for the tenth month in a row.

"...inflation is a matter of concern with which we are dealing and dealing effectively. For the last 6-7 months we have taken a number of steps… Overall, the macroeconomic fundamentals of India remain strong and resilient. Growth prospects are looking good," Das said.

"We remain committed to bringing inflation down to 4 percent over a period of time," he added.

When questioned on the report the RBI has submitted to the government following its failure to meet the inflation mandate, Das said anybody could make an intelligent guess about its contents.

"We have broadly explained the reasons as to why it (failure) happened. I have spoken about it on several occasions…where I have explained why inflation went up in India."

"The other two aspects I don't think I will be able to tell you now. The first question you can answer yourself, but the second two questions I will leave it for the time being," he added, referring to the three questions the report must elaborate on: why the RBI failed, the remedial actions it proposes to take, and the time period within which inflation will return to target.

Das refused to enter into a discussion on whether inflation, globally, will stay high for a long period of time.

"So far as India is concerned, I would say we stand committed to the current (inflation) target of 4 percent, which makes a lot of sense and gives us enough flexibility to deal with crises situations, to deal with shocks like COVID."

"In fact, I would not like this debate to start prematurely. It will only mean less commitment from central banks to fight the war against inflation. I personally believe, and the Reserve Bank of India also believes, that we should not enter into that debate so early in the day. Let us see how it works out this year and next year," Das said.