Monetary policy without (net) reserves

Why all the fuss about reserves? Well, there are clear metrics about reserve adequacy. How many months of imports can reserves cover? What is the percentage of reserves to shortterm external debt?

Recently IMF developed a composite metric that renders reserve adequacy transparent. It is encapsulated by one single statistic that is. By all metrics reserves are inadequate.

This isn’t even comparable to 2001. At that time there was an IMF stand-by. Even though the programme had failed miserably, the IMF support was continuous both in terms of funding and technical expertise.

2008 was an entirely different matter. It was a purely exogenous shock emanating from the developed world. We had c. USD 60 billion net reserves at that time, and the policy rate stood at 16.5%. Using up reserves and cutting the policy rate in response to the shock were both available options back then.

Now we are looking at c. USD 45 billion negative (minus) net reserves. That is incredible. Nobody has ever heard of negative net reserves. If we consolidate with public banks’ net position, the consolidated short position of the public sector climbs to nearly USD 60 billion.

Hence, not only exchange rate stability is a must, but also reserves should accumulate until the buffer zone against any calamity is built up again.

The only chance –if it is a chance- is that the Fed goes on a loosening course. Not only the spread between 2 and 10-years US Treasury notes climbed to 1.26, which is the highest over the last couple of years, but the Fed balance sheet continues to expand.

Basically all overseas players flirting with risk have bought the scenario whereby the Fed remains on hold at near-zero short-term rates, and dollars would be everywhere. Fiscal packages are also rather generous –if they can pass legislation. The “reflation scenario” is still the view of a minority. Whatever reserve accumulation that may be within the power of the central bank, it is now the time to focus on that.