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Subbarao for more reserve currencies

Source : BUSINESS_STANDARD
Last Updated: Wed, Nov 21, 2012 01:41 hrs

The world needs more reserve currencies, says Reserve Bank of India (RBI) Governor D Subbarao.

Delivering the A D Shroff Memorial Lecture here on Tuesday, he said the world would be better served if such a development took place but this should happen in an organic way, not through fiat. Countries need safety nets to protect themselves from the vulnerabilities of the global currency system. At present, he noted, it was America that had the responsibility of ensuring every country had access to dollar liquidity, especially in times of stress.

Countries, he said, could not be asked to desist from building up reserves and depend entirely on external safety nets. Foreign exchange reserves should invariably form the first line of defence. Also, countries need currency swap arrangements. Again, the US has the obligation, as it is the issuer of the global reserve currency, to provide dollar swap facilities to all large economies, including India. This was discussed with the US last month in the ministerial level dialogue, said Subbarao.

One also needs to, he explained, keep a watch on the impact of US policy, as with quantitative easing. The presumption was that money being eased into the system would be utilised for corporations and individuals to borrow and the money absorbed into the American economy. But that does not necessarily happen, so that money flows into the global system, as at present, adding to speculation incommodities and oil prices going up.

He said financial sector reforms had taken centre-stage in the G-20 discussions. Basel-III talks about improving the quantum and quality of capital. But according to Subbarao, emerging economies have two main concerns. First If you demand higher capital and stricter standards of banks, that will make credit more costly and probably hurt growth prospects in emerging economies. Also, if global banks and institutions are required to hold more capital, if their cost of credit goes up, the end result would be that foreign capital coming into emerging economies might become less and costlier, said the governor.



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