India's forex reserves above optimal level: IMF
Wednesday, 27 August 2008
NEW DELHI, Aug 26 (PTI): India's foreign exchange reserves at around USD 286 billion are much above the optimal level, said a recent International Monetary Fund (I.M.F.) study, pointing out that forex accumulation has reduced external vulnerabilities and decreased the risk of financial contagion.
India ranks among the other major emerging Asian nations like China, Hong Kong, Korea, Taiwan and Thailand which have accumulated excessive foreign exchange reserves, said an I.M.F. working paper on "Are emerging Asia's reserves really too high?".
Among the important Asian countries which have near optimal foreign exchange reserves include Singapore, Philippines and Indonesia, it said.
According to the I.M.F. study, as against the optimal reserves of about USD 175 billion towards the close of 2007, India's forex reserves totalled around USD 250 billion and continued to swell.
The reserve buildup, the study said, has reduced external vulnerabilities in all emerging market economies in Asia and helped in maintaining financial stability in the region as a whole.
"Not only are individual economies better prepared to weather a sudden stop of capital flows, but the risk of financial contagion in the region may have decreased as a result of the reserve accumulation", the I.M.F. report said.
The study on foreign exchange reserves, which is based on different parameters and ratios like reserves to months of imports, reserves to broad money supply, reserves to GDP, reserves to short-term debt and reserves to total foreign exchange liabilities, showed that India is holding more than optimal reserves on all counts.
Although foreign exchange reserves equivalent to six to seven months of import bill is considered more than sufficient, India's reserves are much more.
"The average optimal level of reserves for Asia is estimated at around six months of imports, twice as large as the traditional benchmark (three months). Estimated optimal ratios for Indonesia, India, China, and Taiwan Province of China are above six months", the study said.
However, the countries which did not have enough reserves to meet import bill for six months were Singapore, Thailand, Indonesia, Philippines, Hong Kong and Vietnam.
India ranks among the other major emerging Asian nations like China, Hong Kong, Korea, Taiwan and Thailand which have accumulated excessive foreign exchange reserves, said an I.M.F. working paper on "Are emerging Asia's reserves really too high?".
Among the important Asian countries which have near optimal foreign exchange reserves include Singapore, Philippines and Indonesia, it said.
According to the I.M.F. study, as against the optimal reserves of about USD 175 billion towards the close of 2007, India's forex reserves totalled around USD 250 billion and continued to swell.
The reserve buildup, the study said, has reduced external vulnerabilities in all emerging market economies in Asia and helped in maintaining financial stability in the region as a whole.
"Not only are individual economies better prepared to weather a sudden stop of capital flows, but the risk of financial contagion in the region may have decreased as a result of the reserve accumulation", the I.M.F. report said.
The study on foreign exchange reserves, which is based on different parameters and ratios like reserves to months of imports, reserves to broad money supply, reserves to GDP, reserves to short-term debt and reserves to total foreign exchange liabilities, showed that India is holding more than optimal reserves on all counts.
Although foreign exchange reserves equivalent to six to seven months of import bill is considered more than sufficient, India's reserves are much more.
"The average optimal level of reserves for Asia is estimated at around six months of imports, twice as large as the traditional benchmark (three months). Estimated optimal ratios for Indonesia, India, China, and Taiwan Province of China are above six months", the study said.
However, the countries which did not have enough reserves to meet import bill for six months were Singapore, Thailand, Indonesia, Philippines, Hong Kong and Vietnam.