It resembles a high-stakes poker game among central bankers and macroeconomic managers across the world. In the pot are billions of dollars that will potentially move to the United States as and when the world’s largest economy begins unwinding its easy money policy amid signs of a sustained turnaround.
Reserve Bank of India governor Duvvuri Subbarao is conscious that his efforts to arrest the rupee’s slide and lure precious dollars home can be stymied by a gush of dollars to the West that is showing incipient signs of a recovery. On Tuesday Mr Subbarao kept the lending rates unchanged.
Sometime later this year, US Fed Reserve chief Ben Bernanke will likely take a decision by when to stop feeding the extra $85 billion-a-month into the US economy. A part of this dollar deluge had flowed into India. These will now move back home as Bernanke and Subbarao play cat and mouse with interest and foreign exchange rates.
Neither, of course, can be faulted. Mr Subbarao is battling to reverse an economy that has crashed to its lowest growth in a decade and also support the rupee that seems determined to plumb new depths despite a string of measures.
Mr Bernanke is struggling with a roadmap to pull back billions that was injected for years to pump life into a cooling one. The future of the Indian economy, at least in the short term, will critically depend on what happens outside its shores. This is showing up in numbers as well. The current account deficit remains in a worrisome zone in India.
The problem, for Mr Subbarao and India’s fiscal managers in New Delhi’s North Block, is to attract more foreign direct investment (FDI), which is always more welcome than portfolio investment. Yet, don’t expect a flood of dollars to gush in immediately despite the recent policy overhaul.
Actual inflow comes with a time-lag as investment decisions are well thought out and are predicated on a variety of factors including global perceptions about the destination country. We cannot lose sight of the fact that India will be competing with other emerging nations to attract from the same pool of dollars.
The policy gridlock for too long a period hasn’t done India’s reputation any good. Brave and bold steps are needed to turn the tide.