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South African Reserve Bank

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Working Paper – WP/15/04: Vulnerability to Normalization of Global Financing Conditions: An Operational Approach
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Shakill Hassan, Merrisa Paul and Siobhan Redford
Working Papers

A simple ratio of foreign exchange reserves to the gross external financing requirement (GEFR) largely explains the cross-sectional variation in exchange rate depreciation over the taper tantrum in 2013. We update the ratio for a set of emerging markets, and compare current to previous exposure. South Africa’s relative position barely changed between mid-2013 and early 2015. In contrast, India rapidly increased its ratio of reserves-to-GEFR through improvements in each component of the indicator; and forcefully reduced inflation. We document a reduction in high-frequency reactions of the rupee to FOMC meetings. Reducing vulnerability to imminent tightening in US monetary policy requires, above all, reducing the external financing requirement and/or increasing the stock of reserves.

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