It is important for India to build up a second line of defence in terms of access to foreign exchange to fight currency shocks, deputy chairman, Planning Commission, Montek Singh Ahluwalia, observed here on Friday.
Referring to the Contingent Reserve Arrangement (CRA) of $100 billion being put in place by the BRICS nations, Ahluwalia said the fund was not expected to help India in the immediate future, but was more in the nature of a long-term safety net. “Our borrowing capacity goes up and it has a calming effect on the markets,” Montek pointed out, saying he didn’t expect India to be accessing the CRA anytime soon.
Speaking to newspersons, he said the same was true for the currency swap agreement that India has with Japan, adding the country didn’t need to draw down any line of credit right now since the foreign exchange reserves, at approximately $280 billion, were adequate.
The exchange rate volatility that India faced, as seen in the sharp depreciation in the Indian currency, Ahluwalia said was not entirely unconnected with the reaction of the markets to the possibility of an early taper of quantitative easing by the US Federal Reserve.
“Some of the depreciation of the rupee was justified and economists have talked of a range between 59 and 65, but the currency did overshoot,” he said.
Ahluwalia said India does acknowledge that it has a large current account deficit (CAD).
“Our position is not that we do not have a CAD problem,” he said.
China will contribute the lion’s share of the $100 billion currency reserve fund to be set up by the BRICS although no timelines have been set by which the arrangement will be in place.
Prime Minister Manmohan Singh welcomed the CRA saying it had acquired greater salience amid global currency volatility. The BRICS nations had met informally on Thursday on the sidelines of the G20 Summit. The CRA, the broad contours of which were drawn in Durban, will have an initial corpus of $100 billion with the commitment from China at $ 41 billion and Brazil, India, and Russia contributing $18 billion each. South Africa will chip in with$ 5 billion.