Stating that even though the formation of a stable government at the Centre has mitigated political risk, a top Reserve Bank official today said India continues to face threats on the growth and external sector fronts.
"With a stable Central Government in place, political risk has abated," RBI Executive Director Deepak Mohanty said, presenting a paper on "Unconventional Monetary Policy and the Indian Economy" at a symposium in Colombo.
However, he cautioned that even though we are out of trouble inflicted after the US Fed announcement to stop its asset repurchase program in May last year, some concerns on the growth and external fronts remain.
"Nevertheless, headwinds to growth from domestic constraints continue to pose downside risks, and vulnerabilities in India's external sector, though mitigated, have not totally disappeared," Mohanty said.
He explained how the US Fed announcement had caused difficulties for the emerging market economies.
Mohanty, who is part of the monetary policy department at RBI, summarized the multi-pronged response by the country on trade, capital flow management, currency intervention and monetary policy fronts.
"There is a need to use multiple instruments, including drawdown of foreign exchange reserves, monetary tightening, augmentation of reserves and administrative measures to dampen speculative outflows and encourage inflows to stabilize market conditions," he said.
"At the end it is difficult to say what worked and what did not work and how best to sequence these policies; but surely once the pressure abates it is important to reverse extraordinary measures to reinforce market confidence."
Following the May 22 announcement by the Fed, there was a heavy depreciation in the rupee due to India's external sector vulnerabilities. From a level of 55 against the dollar, it touched an all-time high of 68.54 in August.
"While spillover is unavoidable, domestic fundamentals are important to cushion its adverse impact, particularly for countries with greater external financing requirement as reflected in their current account deficits," he said.