RBI Guv Wary of Trade Wars, Backs High Forex Reserves

Reserve Bank of India Governor Shaktikanta Das has expressed concern over the impact of stressed trade negotiations and rising geopolitical tensions on global economy while backing the building up of forex reserves by emerging economies as safeguard against global contagion. The balance in global economic order has already seen marks of stress with low interest rate policies followed by advanced economies over a period. “International coordination has become somewhat weaker in the very recent years. Many advanced economies have been pursuing low interest rate policies for long, perhaps without adequate recognition of their adverse impacts,” Das said. “Solutions are turning more difficult to come by as the global economy seems to be moving into a new and unsettling phase in an environment of stressed trade negotiations, rising geopolitical confrontation, limited policy space and high debt levels in several economies. General government debt of advanced economies as a group has surpassed 100% of GDP. The fiscal space is also constrained in many of the advanced economies,” he said at a book launch in the city. At the global level, the total amount of bonds with negative yields has risen to nearly $13 trillion, implying that nearly a third of government bonds in advanced economies trade at negative yields. 

Das has also disapproved of US Treasury’s move to label its important trade partners as “currency manipulators” and called for greater understanding to the compulsions of emerging market economies in building up their own buffers. “A question that crops up is why has labelling become a bilateral prerogative when a multilateral institutional (read International Monetary Fund) architecture exists for the purpose?” Das said. India has recently been removed from the US monitoring list of possible currency manipulators for gaining unfair export advantages after featuring in it from 2017 while the country’s forex reserves have grown to $430 billion. China, Japan, Germany and South Korea stayed on the list. Das has called for better understanding of the nature of shocks emerging economies face from balance of payments strains to full-blown financial crises. “In the years following the global financial crisis, EMEs and financial markets have been buffeted by global spillovers which have amplified both sudden surges and sudden stops or reversals of capital flows. The existing state of financial safety nets, regional or multilateral, fall grossly short of providing the necessary buffers against such turbulence,” Das pointed out, saying that these countries have accumulated reserves over the past two decades that significantly reduced the sensitivity of capital flows to push factors.

The Economic Times, 27th July 2019