{"id":126707,"date":"2021-08-17T18:40:50","date_gmt":"2021-08-17T13:10:50","guid":{"rendered":"https:\/\/blog.forumias.com\/?p=126707"},"modified":"2021-08-18T09:40:53","modified_gmt":"2021-08-18T04:10:53","slug":"reserves-the-rare-model-in-india","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/reserves-the-rare-model-in-india\/","title":{"rendered":"Reserves: The RARE model in India"},"content":{"rendered":"<p><strong>Source: <\/strong><span style=\"color: #0000ff;\"><a style=\"color: #0000ff;\" href=\"https:\/\/www.business-standard.com\/article\/opinion\/reserves-the-rare-model-in-india-121081601744_1.html\">Business Standard<\/a><\/span><\/p>\n<p><strong>Relevance: <\/strong>Foreign Exchange reserves in India and issues related to it<\/p>\n<p><strong>Synopsis: <\/strong>India should do away with the prevailing RARE model of reserves in a phased manner.<\/p>\n<h5><strong>Context<\/strong><\/h5>\n<p>The\u00a0foreign exchange reserves\u00a0in India are close to $620 billion. Recently, a parliamentary panel and the Union Minister Nitin Gadkari observed that the Reserve Bank of India (RBI) is possibly holding excessive reserves.<\/p>\n<h5><strong>RARE model<\/strong><\/h5>\n<p>RARE stands for <strong>Reserves for Atmanirbharta, Ratings, and Exchange rate stability.<\/strong> However, the first two of the three objectives are not explicit; only the third is.<\/p>\n<h5><strong>Reasons behind huge forex reserve by RBI<\/strong><\/h5>\n<p>RBI maintains a huge forex reserve under the RARE model.<\/p>\n<ol>\n<li><strong>First<\/strong>, to supplement the policy of <strong>Atmanirbharta. <\/strong>There has been an emphasis on atmanirbharta (self-reliance). It is about pushing exports and discouraging imports. This policy is keeping the current account deficit in check<strong>.<\/strong>\n<ul style=\"list-style-type: disc;\">\n<li>But given the large capital inflows, there is a need for the RBI to absorb the extra dollar inflow and increase its reserves. And, purchases of foreign currencies by the RBI keep the rupee on an average at a low level.<\/li>\n<\/ul>\n<\/li>\n<li><strong>Second, to achieve decent international ratings: <\/strong>The fiscal situation in India is quite weak, which is why the international ratings of the Indian sovereign are consistently very low. In fact, if the RBI was not holding a very large amount of reserves, the ratings could have been lower still.<\/li>\n<li><strong>Third<\/strong>, <strong>to maintain exchange rate stability.<\/strong> If the dollar fluctuates significantly, the RBI can buy or sell dollars to ensure stability. Large reserves can <strong>avoid a collapse in the external value<\/strong> of the rupee.<\/li>\n<\/ol>\n<h5><strong>Why India needs to relook RARE model?<\/strong><\/h5>\n<ul>\n<li>Sustaining the rupee at a low level for long may not end well. In Japan, the policy of low yen was brought to an abrupt end through the <strong>Plaza Accord<\/strong> with the US in 1985. Hence, we need to be careful with any important <strong>\u201cdisequilibrium\u201d price. <\/strong>India is already on the US list of possible currency manipulators.<\/li>\n<li>India now has <strong>flexible exchange rates and inflation targeting.<\/strong> Flexible exchange rates facilitate adjustment, and inflation targeting prevents prices and the exchange rate from going out of control.<\/li>\n<li>In order to be able to settle our obligations in the future, we should have adequate assets, not huge amount of liquid assets in form of huge forex.<\/li>\n<\/ul>\n<h5><strong>Measures<\/strong><\/h5>\n<ul>\n<li>There is need to <strong>raise the tax-GDP ratio<\/strong> and provide for a <strong>tax on sudden and large capital flows<\/strong> that can cause negative externalities.<\/li>\n<li>India can buy <strong>additional credit<\/strong>\u00a0in normal times. The availability of credit line on reasonable terms has improved over time. So, there is no pressing need for large reserves.<\/li>\n<\/ul>\n<p><span style=\"text-decoration: underline;\"><strong>Terms to know<\/strong><\/span><\/p>\n<ul>\n<li><strong><a href=\"https:\/\/forumias.com\/blog\/plaza-accord\/\" target=\"_blank\" rel=\"noopener\"><span style=\"color: #0000ff;\">Plaza accord<\/span><\/a><\/strong><\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"<p>Source: Business Standard Relevance: Foreign Exchange reserves in India and issues related to it Synopsis: India should do away with the prevailing RARE model of reserves in a phased manner. Context The\u00a0foreign exchange reserves\u00a0in India are close to $620 billion. Recently, a parliamentary panel and the Union Minister Nitin Gadkari observed that the Reserve Bank&hellip; <a class=\"more-link\" href=\"https:\/\/forumias.com\/blog\/reserves-the-rare-model-in-india\/\">Continue reading <span class=\"screen-reader-text\">Reserves: The RARE model in India<\/span><\/a><\/p>\n","protected":false},"author":10316,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[1230,9],"tags":[8717,3720,216,8716,9121],"class_list":["post-126707","post","type-post","status-publish","format-standard","hentry","category-9-pm-daily-articles","category-public","tag-currency-related-issues","tag-foreign-exchange-reserves","tag-gs-paper-3","tag-money-and-banking","tag-rare-model","entry"],"jetpack_featured_media_url":"","views":"","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/126707","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/10316"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=126707"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/126707\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=126707"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=126707"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=126707"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}