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No tinkering, please

comment Updated: Apr 13, 2014 23:34 IST

One hopes RBI governor Raghuram Rajan is spot on when he says he has no differences with the BJP leadership, though some utterances by functionaries of the saffron party can cause alarm.

The last thing the country expects from the new government is to remove key holders of important institutions.

The BJP would do well to remember the UPA government in 2004 did not remove YV Reddy from the post of RBI governor even though he had differences of opinion with finance minister P Chidambaram on taxing foreign inflows and he was allowed to complete his term.

The BJP should also look at another side of the picture. Mr Rajan’s proposal for better monetary coordination among the central banks in emerging-market economies is predicated on the possibility of imbalances that may arise if foreign institutional investors (FIIs) lose their new-found confidence in the India story after a long period of lull.

FIIs own about $250 billion of Indian equities, which is 25% of the whole.

And his urging of his counterparts in developed economies to consider the effects of their domestic stimulus on emerging markets has to be seen in the context of the fact that any sign of the Fed reducing its bond buying will send the interest rates high in the US and there will be a flight of capital from the Indian stock markets.

Mr Rajan’s concern is understandable given the fact that India has received about $4 billion of inflows during the period January-March.

Mr Rajan said at the Brookings Institution “the current non-system in international monetary policy is in my view a source of substantial risk, both to sustainable growth as well as to the financial sector…” “Non-system” here would bring to mind the Asian currency crisis of 1997, when the ratio of foreign debt-GDP in several South-East Asian nations rose close to 180%.

This was partly a fallout of foreign money-induced development strategy that these countries had pursued since the 1980s.

India was insulated because of its tighter controls and not allowing convertibility on the capital account, and through a judicious mix of instruments such as the market stabilisation scheme.

The government and the RBI have their fiscal and monetary policies to maintain a balance between the markets, inflation and growth. Mr Rajan’s suggestion is futuristic, and shall be referred to when a new architecture of international finance evolves.