Reserve Bank of India Governor Y Venugopal Reddy on Sunday told the International Monetary and Financial Committee of the IMF-World Bank that the accumulation of huge foreign exchange reserves by Asian countries reflected their lack of confidence in the international financial architecture.
His statement assumes significance given the 25 per cent rise in India's forex reserves to $88 billion in the current calendar year.
The improved reserves position in emerging economies would provide "self-insurance" and lend necessary flexibility for exchange rate management, Reddy said.
In his first official statement since he assumed charge as RBI governor, Reddy sought to insulate India from the rest of the world by projecting a robust picture of the Indian economy.
He expected much higher growth in the current fiscal, which would be aided by benign inflationary conditions, adequate liquidity, soft interest rates and a strong external sector.
"The overall policy environment has fostered macroeconomic stability and generated optimism regarding the medium term," he said in an address to the International Monetary and Financial Committee.
As far as the outlook for the world economy was concerned, Reddy said it continued to be fragile and weighed by downside risks.
"Data on industrial production and trade growth indicate a marked slowdown. The rise in oil prices in the recent weeks is also worrisome. Investment activity in major industrial countries is yet to show a decisive turnaround," he said.
Reddy, who represented India in the absence of Finance Minister Jaswant Singh, however, said reducing the central and state fiscal deficits -- which stand at over 10 per cent of the gross domestic product -- was the primary challenge in macroeconomic management now.
The Fiscal Responsibility and Budget Management Act would help the government to reduce borrowings in phases, he said, adding that this would "crowd-in" private sector investment and accelerate growth.
Re-affirming India's commitment to adopting a multilateral approach to trade talks, Reddy said, once the concerns of the developing countries were adequately reflected, rapid progress in the trading environment could be expected.
Developed countries must cut their high tariffs and subsidies in agriculture, provide effective market access, facilitate trade in services, and give effect to the clauses extending special and differential treatment to developing countries in the implementation of World Trade Organisation agreements, he said.
Reddy also made a strong pitch for increasing the quotas of developing countries in multilateral institutions like the IMF.
"The present quota formulas do not reflect a position that is truly representative of a country's profile in the world economy," he said.
The quota review exercise should ensure adequate, equitable and appropriate representation of developing countries, he added.
Reddy reflections
- India to post robust growth, world economic outlook looks fragile.
- High fiscal deficit, biggest challenge in macro-economic management.
- Addressing developing countries' needs will speed up trade talk progress.
- Present quota formula not representative of country's profile in world economy.
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