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Strong forex kitty helps to absorb external shock

Mumbai, Aug. 30 (PTI): The Reserve Bank of India today said that accretion of $ 6.5 billion to foreign exchange reserves till August 16, 2002, in the current fiscal, has helped the apex bank to ensure orderly market conditions and insulate the country’s economy from external shocks.

The strategy of building up foreign exchange reserves has helped to manage liquidity risks associated with various types of capital flows and debt servicing, RBI said in its annual report for 2001-02.

The favourable balance of payments conditions have vindicated the policy of ensuring orderly market conditions with no fixed target for the exchange rate, RBI said. India’s forex reserves ($ 60.6 billion) have grown more than five-fold in the last ten years, and cross country comparison indicates that the rupee was relatively stable vis a vis other emerging market currencies, the RBI said.

With the continuing strength of the capital flows, including the largest net inflow of foreign direct investment recorded for any single year, the economy was experiencing a relaxation of the balance of payments constraint on growth.

India was among the strongest growing economies in the world in 2001-02 despite an international environment, bound down by the synchronised weakness affecting large parts of the global economy, the RBI said.

Weakening of global demand affected India’s merchandise exports in fiscal 2002 but the buoyancy of software, private business and commercial services exports helped to post a modest current account surplus after 24 years, it added. The RBI said the average monthly turnover in the merchant segment of the Indian forex market declined from $ 23 billion in 2000-01 to 21 billion in fiscal 2001-02.

In the inter-bank segment, the turnover grew to $ 97 billion and total monthly turnover increased from average $ 116 billion in fiscal 2001 to $ 119 billion in 2001-02, it said. The forward long term premium (three to six months) for the foreign currency were lower than one month premia in March 2002, it said adding average forward premium for three and six month contract declined to 4.4 and 4.6 per cent respectively in July 2002, it said.

The apex bank said the monetary and credit policy has been reinforced by favourable developments in the form of low inflation, ample liquidity in financial markets, continuing capital inflows and a substantial buildup of forex reserves.

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