The Indian economy has exhibited a stronger pick-up in momentum of recovery than expected, said Reserve Bank of India Governor Shaktikanta Das on Thursday.
Addressing the 4th Annual Day of Foreign Exchange Dealers’ Association of India (FEDAI), he cited that a multi-speed normalization of activity in Q2FY21, after the country witnessed a sharp contraction in GDP by 23.9 percent in Q1FY21.
“Even as the growth outlook has improved, downside risks to growth continue due to recent surge in infections in advanced economies and parts of India,” he said.
“We need to be watchful about the sustainability of demand after festivals and a possible reassessment of market expectations surrounding the vaccine.”
Besides, he said that monetary policy guidance in October emphasized 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.
“A key source of resilience in recent months has been 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 inflows, and sustained build-up of foreign exchange reserves,” he said.
“The Government’s recent policy focus to enhance India’s participation in global value chains, including through production linked incentives for targeted sectors, can leverage the strong external balance position of India.”
On the financial markets, he said conditions were benign at the start of the year but witnessed severe stress and dislocation as the Covid-19 pandemic unfolded.
“The Reserve Bank acted proactively and nimble-footed to ease financial market conditions and mitigate risks with a slew of conventional and unconventional measures. Market participants responded with alacrity and together we have been able to ensure stable and resilient markets across all segments,” he said.
“The Reserve Bank remains committed to fostering orderly functioning of financial markets and will continue to evaluate incoming information having a bearing on the financial markets and act, as needed, to mitigate any downside risks.”
Furthermore, he cited that the Reserve Bank has taken steps to usher in the next phase of reforms to accelerate the pace of financial markets’ liberalization.
“The broad approach driving the recent regulatory initiatives is that any person with a need to access financial markets should be able to do so with ease at minimum cost. Principle-based regulations for interest rate derivatives and foreign exchange derivatives aim at achieving this broad objective,” he said.
“Users with limited or small hedging requirements have been allowed to enter into contracts equivalent of USD 10 million without the need to establish the existence of underlying exposures.”
In addition, Das said that as a major milestone towards opening up of markets, banks in India have been permitted to deal in the offshore rupee derivative markets.
“The measure is expected to reduce the segmentation between onshore and offshore markets, apart from reducing volatility and the cost of hedging. Banks have also been permitted to undertake foreign exchange transactions beyond the usual onshore market hours, thus fostering real-time market activity,” Das said.
“In a complementary measure, exchanges and banking units in the GIFT City have been permitted to undertake Over the Counter (OTC) and exchange-traded rupee derivatives.”