Parliamentary standing committee on finance has questioned RBI on whether the returns on reserves deployment have been impacted by the global financial crisis
MUMBAI: EVEN as the Reserve Bank of India (RBI) has assured that banks in the country are insulated from the crisis in the US subprime mortgage market, parliamentarians are concerned about the impact of the subprime crisis on the country’s forex reserves.
The parliamentary standing committee on finance, which visited the country’s custodian of foreign exchange reserves the Reserve Bank of India, has questioned the central bank on whether the returns on reserves deployment were impacted by the global financial crisis. The country has a kitty of over $300 billion in forex reserves. This is deployed in a variety of instruments, including deposits with other central banks, foreign banks as well as in top-rated sovereign paper.
According to sources, present at the meeting, the RBI delegation led by RBI governor YV Reddy and other top officials has said that it would give a written reply to Parliament soon. However, the information would be public by end-August, when the central bank releases its annual report. The parliamentarians had queries on a series of issues, including the rising fiscal and current account deficit. In addition, RBI has also admitted that deteriorating fiscal as well as the external sector balance sheet would be a major challenge for the central bank in achieving its monetary policy objectives.
Revenue deficit and gross fiscal deficit were higher than a year ago period, both in absolute terms and as percentages to budget estimates. RBI has, in its review of the macro and monetary developments released on Monday, said that the government’s finances may come under pressure during FY09 on account of the Sixth Pay Commission award, including payment of arrears. Further worsening the government’s finances are measures to contain inflation, including reduction of duties on petroleum products, higher oil subsidies, increase in fertiliser subsidy due to sharp rise in prices of raw materials and fertilisers in the international market.
In addition, the burden of debt waiver to farmers would further widen the fiscal deficit. Also, the comfort on the external sector may also be eased. During FY08, the widening of the trade deficit mainly led by imports, resulted in a widening of current account deficit to $17.4 billion (1.5% of GDP) from $ 9.8 billion (1.1% of GDP) in 2006-07 even with a large net surplus in the invisible account (6.2% of GDP in 2007-08 against 5.8% in 2006-07).
