The US Federal Reserve's decision to continue its easy-money programme and monthly purchase of bonds to hold down interest rates, is good for India, which now must urgently address the issue of its widening current account deficit, said Subir Gokarn, former RBI deputy governor and research director at Brookings India, in a interview on the sidelines of a think-tank event in Washington on Wednesday.
Excerpts from the interview:
The Fed has decided to postpone the taper. Is that good news or bad news for India and why?
I think from the immediate viewpoint of pressure on the currency, it's very good news because the trigger for the sharp depreciation in the last few months starting may was the growing expectation that the taper would begin. But as expectation of the taper being postponed or diluted started in the last few weeks, the currency tended to stabilize. So there was a direct correlation.
So it is breathing room (for India), and space to manoeuvre. It now shifts the onus on to domestic policies. What is the government going to do to reduce vulnerabilities to subsequent developments? The taper (of the bond buying programme) may have been postponed but it's going to come. And unless countries vulnerable to these liquidity shocks have prepared to deal with them, the story could repeat itself.
Is India prepared to deal with those shocks?
That has to be the priority of the government. It has to quickly find ways to put in place credible strategies to narrow the current account deficit because that is the proximate cause of the problem.
What should the government do immediately?
It is difficult to do anything immediately. But they have to start taking steps that can lead to outcomes in that direction. Number of pressure points -- on the mineral front oil, coal, gold and iron ore, each of them has contributed to widening the current account deficit. We have to takes steps to address that. And the steps to be taken are being debated widely in the public domain. Bringing them into play and putting a strategy in place that convinces the world at large are being done. It is an important signal to send.
How long before the rupee stabilizes?
Stability will come about as a result of both global and domestic factors. If, for instance, the Fed has postponed the taper, we will wait for the transition -- to see who the next chairman is, and what their position is going to be.
But on the domestic side very concrete steps will be needed to come to grips with the current account deficit. There are larger macro issues also, but current account deficit is the most important issue.
Do you have any advice for the new RBI governor Raghuram Rajan?
No, I don't give advice to anybody in the public domain. But if people like to ask they will.
But what would you like to see him do?
The problems are well known, (such as) the limitations of (our) monetary policy and its ability to influence things. They are all very well aware of what they need to do and I wouldn't presume to give any advice at this moment.