The sustainability of demand after festivals and a possible reassessment of market expectations surrounding the vaccine needs a close watch, according to Reserve Bank of India Governor Shaktikanta Das.
Even as the growth outlook has improved, downside risks to growth continue due to the recent surge in infections in advanced economies and parts of India, the Governor said in his address at the 4th Annual Day of Foreign Exchange Dealers’ Association of India (FEDAI).
Das reiterated the October 2020monetary policy guidance, which emphasised the need to see through temporary inflation pressures and also maintain the accommodative stance at least during the current financial year and into the next financial year.
He observed that the comfortable external balance position of India, supported by surplus current account balances over two consecutive quarters, resumption of portfolio capital inflows on the back of robust FDI (foreign direct investment) inflows, and sustained build-up of foreign exchange reserves have been a key source of resilience in recent months.
Das underscored that a calibrated opening up of the economy can supplement domestic savings and help finance growth and development.
Capital account convertibility
The Governor said capital account convertibility (CAC) will continue to be approached as a process rather than an event, taking cognizance of prevalent macroeconomic conditions. A long-term vision with short- and medium-term goals is the way ahead.
What CAC means is that there will be no restriction on conversion of the domestic currency into a foreign currency to enable a resident to acquire any foreign asset, or on conversion of a foreign currency to the domestic currency to enable a non-resident to acquire a domestic asset.
Das noted that the issue of fair and transparent pricing of foreign exchange products, especially for MSMEs (micro, small and medium enterprises) and other smaller users, has been occupying the central bank’s attention.
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Market-makers are now mandated to separately disclose fees/ charges when dealing with retail users. Also, an anonymous order matching electronic trading platform, called FX-Retail, has been launched by the Clearing Corporation of India (CCIL), at the behest of the RBI.
“This platform allows users with small transaction sizes to undertake transactions at best available market rates. These measures are expected to ensure greater transparency and protection of the retail user.
“Concerted efforts by banks will be needed if the benefits of transparent and competitive pricing are to reach every user of the foreign exchange markets,” the Governor said.
He emphasised that the simplification and flexibility provided in the regulations must reach the end-user. In designing new products and new market segments, risk management systems and responsible market conduct should evolve in tandem as India opens up to global players.
Transition from LIBOR
Das observed that a key issue, which has been engaging global attention, is the transition from the LIBOR (London Inter-Bank Offered Rate) to alternate reference rates.
In this regard, he said several measures have been taken in India to make financial benchmark processes more transparent and robust.
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Most recently, the administrators of significant financial benchmarks were brought under regulation to ensure robust governance frameworks and process controls.
“These reforms will stand us in good stead as we prepare ourselves for the LIBOR transition. The Indian Banks’ Association has been working closely with market participants to facilitate the transition to alternate benchmarks and create customer awareness.
“Achieving a smooth transition from a benchmark entrenched in the financial system will require significant efforts from all stakeholders,” the Governor said.