Bimal Jalan, Former Governor, RBI in an exclusive interview with Supriya Shrinate of ET Now, discusses the steps taken by the government to prop 65841625
up the rupee and current account deficit and what more can be expected. The government has to ensure that the capital or debt that we owe to the rest of the world in dollars in short run does not exceed the limit that we can meet in terms our own foreign exchange resources over a period of time.Edited excerpts: A slew of measures have been announced and we are calling it rebooting the rupee and managing the macros. What do you make of these measures? Do they send out a signal that the government is proactive, is in command or are we actually sending out mixed signals of panic here as well? No, I do not think there are any panic signals, but let us wait and see how it works out. Those five are very important measures in terms of capital flows inside India. Let us hope it works and if they do work in terms of FDI and other investment that we are thinking about as well as the Indian investors investing aboard in rupees and getting Masala Bonds and so on. So let us just wait and see how it works out and what the expectations around the world are. At the moment, there is certain amount of turbulence all across the global economy including US. Brexit for example has not yet settled. Then of course the situation in European Union also. Let us hope it works out. I am just saying that wait and watch. We must wait and watch but DEA secretary Subhash Chandra Garg was here with us on ET Now the day the measures were announced. He said that the government expects about $8 to $10 billion inflows on account of these measures. My question really is why are we making measures to attract $8 to $10 billion when you have a forex reserve of $400 billion? Are we not sending out a signal that the government is in panic mode? No, we are not sending out a signal that the government is in a panic mode but the government is certainly sending out a signal that we will manage it. So far as you say that if the rupee is depreciating and if the RBI is releasing foreign exchange from its reserves which are very high, then there will be a panic in the sense that that we will be spending 10 billion, 20 billion, 30 billion one does not know. The government is trying to support the work being done by the RBI to reduce the range of what you might call depreciation rupee which is very short term. So, hopefully these would work. I have not seen the Sensex now but hopefully that some of these measures would give confidence that we will have enough foreign exchange reserves to tackle any uncertainty regarding what the future is in terms of the global economy. But this fall in rupee is largely on account of global factors. The rupee is right now at 72.53. My view is that the assumption within the government was that the rupee will be in 72-72.5 range. Is that the level that you see for the rupee? How do you believe the global factors will be weathered by the measures that we have taken because global factors are against emerging market currencies at this moment? So far as the global reaction is concerned, they are also waiting to see how the dollar develops and dollar is strengthening and so on. If dollar is strengthening, then there will be a case for them to wait and see how strong it becomes and how far the rupee depreciates. If somebody wants to invest in bonds and so on, they would like to make sure that they get more rupees for the investment in dollars than they do now. So they may wait and watch. It is too early to forecast what exactly will happen. I am just hoping that much of it will work and if the rupee starts appreciating over next week or so, then the measures that we have announced will bring more capital into our country. It is better to just wait and watch for the time being. The government has taken some steps to incentivise short-term capital on the ECB front, reducing the tenure from three to one year. There is no dearth of short term capital in India. Is this a measure aimed at short term because people are divided on what the impact of tweaking ECB norms will be over the medium and the long term. No, that part is correct in the sense that the short term external borrowing at the moment might be regarded as something which is relatively short term in terms of policy. If they are using short term money or short term borrowings in external commercial borrowings (ECBs), then this is not something which is good for our country from a long-term point of view because if there is uncertainty for six months, then instead of just the foreign portfolio investors (FPIs) withdrawing money from India, there will be big action from foreign investors to sell their capital. So, we have to wait and watch and we have to make sure that if there is any uncertainty around the world, then short-term borrowings are avoided. It was the general policy format in India that we were always keeping our capital flows from abroad under control, even in the worst balance of payment crisis. What I am trying is that we have to make sure that the capital or the debt that we owe to the rest of the world in dollars over the short run does not exceed the limit that we can meet in terms our own foreign exchange resources over a period of time.That is a very interesting and a very remarkable point that you are making because the FPI outflow from India in only 10-15 days of September has been about $1.3 billion. Where do you believe the ring fencing needs to happen? What sort of measures does the government needs to put in place along with the ECB tweaking so that we do not risk flight of capital and BoP situation? That is absolutely important. Suppose capital flows had been coming into India in large quantities before these measures and our rupee appreciates a bit, then we have to reverse these measures over a period of time, not retrospectively but prospectively. What I mean is retrospective action must not be taken on any financial matter. Hopefully we will watch how it goes and if it works. On the Masala bonds front, obviously the idea is to incentivise these bonds but investments are an act of faith. They happen once there is a demand supply scenario that is sorted. Capacity utilisation has gone up but are we sitting at the cusp of big investments breaking ground? Will this act as an incentive at all or are we still some quarters away from private investments taking off? No, but dollar is strengthening. If you allow the short term borrowing which has been announced for a relatively short period, then I would see that the demand for short term borrowing abroad will go up because the dollar is strengthening and you will get more rupees for what you have invested abroad in terms of one year deposits. We have to take some time and see how it works and if there is confidence in India’s economy, if the rupee is appreciating, you will find things settling down. The big concern is the ballooning trade deficit in India, $80.4 billion by last count. The government has made it clear that there will be curbs on imports going forward but is that a measure that will serve us any good at all because there are FTAs and imports can be routed through those countries? Isn’t imposing a minimum import price or a safeguard duty on some goods a more elegant way of handling this situation? I think that you are right. We do not want to get back to protectionism of the kind that we had in the seventies and a long time ago. We are a part of the global economy and we have to keep our economy open, liberalised and so on. But the US has also taken some measures as to try and restrict imports. So, at the moment, the whole global economy is undergoing undesirable changes and let us hope that it will work out. We will see stabilisation of the US policy. At the moment they are talking about increasing import rates from China or other countries. That situation is not extremely satisfactory as far as the global system is concerned.The action is being taken by the US, the largest economy in the world, the most important provider of what you might say foreign currency and so we are passing through a phase that happens once in several decades. Let us do our best to make sure that we have enough resources and that we have enough changes in our policies to bring about confidence in investing dollars in India. Is this not sending out a confused trade policy signal as well? You cannot be preaching globalisation to the world and then do exactly the opposite when it comes to your trade? Is this the new reality of global trade? No. What I am saying is so far as India is concerned, we are not a very major player in the global trade and we have to respond to the global circumstances. You must take that into account that if protectionism is increasing in the global economy, even in China or US, then we cannot not respond to it. We are responding to it but let us hope that all the soot settles down. America has announced some more import duties and therefore they would be restricting import and China has responded and I mean it is a very confusing signal just now. Every 30-40 years, something like this happens and I hope things would settle down. US should take into account the fact that the global economy, the globalisation, the free trade principle that they were all worth moving on. I hope this will happen over a period of time. WTO has a role to play but they have also made this slightly less important. We are going through a turbulent phase. Let us try and stabilise it and do our best to meet all the requirements which we need to tackle. Given the fate of the rupee right now and given our current account deficit levels, even though inflation is largely under control, now that these measures have been taken what stance do you see for the policy in terms of where is the rate trajectory going to be? The most important thing right now is that in response to the measures which have been announced by the government, RBI should try and protect the rupee as far as possible and ensure confidence in the market so that the steps are successful. We have handled the Asian crisis in the Reserve Bank. It was done by beating the market expectations that the rupee would not depreciate but then when it depreciated to a point where we did not want it to, the RBI intervened very strongly despite not having too much balance of payments resources. Today we have enough foreign exchange. Som we have the means to achieve our ends. This is the point I want to emphasise. You should watch the market and see that the expectations are not for a further depreciation of the rupee and if this happens, then RBI should intervene strongly, that is all. You are going to vote in favour of a rate hike at this point in time? No, I do not vote, no. I do not vote on the interest rates.
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