RBI governor calls for better access to currency swap lines
Urjit Patel says emerging markets largely have been excluded from the global networks
The governor of the Reserve Bank of India on Sunday called on major central banks to extend their network of currency swap lines deep into emerging markets, saying a type of “virtual apartheid” in the provision of foreign currencies hampers efforts to fight financial instability.
Urjit Patel’s unusually forthright language — central bankers rarely criticize each other in public — offers a glimpse of tensions among policy makers as an improvement in the global economy encourages some central banks to step back from the easy-money policies they have pursued for more than a decade. So-called swap lines have emerged since the financial crisis as an important tool in stabilizing the financial system by allowing central banks to funnel foreign currencies to banks in their home countries during a funding squeeze. Access to dollars in particular is critical to the global banking system.
A patchwork of swap lines exists between the Federal Reserve, the European Central Bank (ECB), the Bank of Japan and other major central banks, while the People’s Bank of China has established its own swap lines with countries as diverse as South Korea, Argentina and Ukraine, partly as a way to boost international use of the yuan and grease the wheels of Chinese trade.
But Mr. Patel said at a seminar hosted by the Group of 30 in Washington that there is a stark asymmetry in how central banks make their currencies available to their counterparts across the world.
SOME OF US WOULD GOAS FAR AS DESCRIBING THIS SITUATION AS VIRTUAL APARTHEID, IN WHICH SYSTEMIC CENTRAL BANKS PROTECT THEMSELVES AND THEIR SELF INTEREST... URJIT PATEL RBI governor
He said emerging markets have been largely excluded from this global network, forced instead to husband huge foreign-exchange reserves they can deploy to stabilize their economies in the event of economic upheaval.
“Some of us would go as far as describing this situation as virtual apartheid, in which systemic central banks protect themselves and their self interest. Meanwhile, EMEs on the receiving end of global financial turbulence are systematically denied access,” Mr. Patel said, referring to emerging-market economies.
“The time has come to end this sectarian approach and access to swap lines be made equally available,” he said.
Mr. Patel’s remarks come as emerging markets brace for the ripples of changing central-bank policy in advanced economies. The Fed, the ECB and the Bank of England have begun taking steps to withdraw some of the monetary stimulus put in place to shore up their economies since the world tipped into recession in 2009.
Rising interest rates in advanced economies can pull capital out of emerging markets, causing a headache for finance ministries and central banks trying to steer such economies.
Agustín Carstens, the governor of Mexico’s central bank, said at the same G-30 panel that with central-bank policy shifting in the West, “emerging markets need to prepare for contingencies.”
The G-30 is a private group of prominent central bankers, financiers, regulators and academics.