We have to ensure that there is no speculative pressure on the exchange rate of a kind that cannot be handled through the policy framework, Bimal Jalan, Former
Governor, RBI, tells Supriya Shrinate of ET Now, in an exclusive interview. Edited excerpts: Are fresh fault lines emerging in the Indian macro economy that worry you at this stage? I do not see that we have macroeconomic negative dimensions which can bring about the kind of crisis that some other countries have faced with oil prices. We are managing the oil prices also. We are managing our oil prices in terms of what we are charging, the taxation that is happening. I may be sounding very optimistic about our policies and macro economy but what I am saying essentially is that we are responsive. It is an accountable system and we can manage the various variables which was not the case in the ‘90s when we had balance of payments crisis of a very fundamental nature and we were dependent on aid from abroad. The current account deficit has increased from 1.9% to 2.4% of the GDP over just a quarter — from Q4 of last fiscal to Q1 of this fiscal. Are you worried about that and how worrying is it really? It is true that if the current account deficit increases beyond a point where we cannot finance the deficit, then there is a problem and we have to do something to make sure that exports increase and imports do not increase to the same extent or the trade deficits do not increase significantly. But if we have a trade deficit of the kind that we have now, we have sufficient resources to handle it. In terms of policy, we want to make sure that the effective exchange rate is competitive and that export markets are such that we can export and try and reduce our own trade deficit. I am sure that we would not go beyond what you might say a safe level even where our trade deficit is concerned. I know you believe that the rupee should be making its own level in the market and it is a function of how the market is treated, but given the volatile fall that we have seen in our own currency and the emerging market contagion, does one make peace with the fact that this is the new range of our rupee? No, the two issues are not related. The emerging market contagion may affect us but we can handle the rupee depreciation. It is up to the RBI to make sure that it does not cause anxiety and any unreasonable expectation that rupee would decline further than what it is expected to in terms of various other measures, effective exchange rate or real effective exchange rate or what is happening in the rest of the world. We can manage because our reserves are high. What I am saying is that we are in a state where we can handle any of the pressures that we are encountering, though in terms of exchange rate, it causes anxiety in the markets and if there is anxiety, then people start buying dollars which could lead to a substantial decline in our reserves. We do not want that to happen. We have handled the East Asian crisis and the management was essentially that in terms of exchange rate, you have to be very careful to ensure that there is no speculative pressure on the exchange rate of a kind that cannot be handled through the policy framework. You mentioned the Asian crisis and as someone who handled that, you talk about killing speculation. The government we are given to understand, told the RBI to act more proactively, boost efforts to defend the rupee. What must the RBI do right now to defend the currency other than just throwing forex behind it? The most important role of the central bank is that if the market is behaving in a way that we think is speculative, then it is not the real need for foreign exchange that people are buying but people are buying foreign exchange because they expect rupee to depreciate. Essentially these two are different issues and in case of speculation, the RBI should surprise them by intervening at a point when it is not expected to intervene. But is it time that the government comes up with a definite one-time strategy which will restore sanity for the rupee and which will also help rein in CAD like it was done in 2013, an 80/20 sort of scheme and FCNR(B) and things like that? I would not concentre only on the current account deficit, but I agree with your point about the exchange rate. The time has come for market expectations to be reversed and that rupee will not depreciate unless the government or RBI wants it to be effectively competitive. We have arrived at that point where you should reverse the expectations of any depreciation in the rupee. Current account deficit per se has to be handled over the medium term. But if you look at how trade deficit ballooned from a $112 billion to $167 billion between FY17 and FY18, did we also allow the rupee to appreciate way too much and is that perhaps why the correction is now hurting us all the more? Rupee appreciation was not the problem so far as current account deficit is concerned. It is the oil prices. It is a fact that our exports did not have the same kind of incentives as we needed to provide. In a world with lots of emerging markets competition, our export structure is different globally then say China’s. What I am trying to get to you is that we have the resources at the moment to handle that current account deficit issue also and its impact on exchange rates as well as to make sure that our growth rate is not affected adversely because of these developments. How will all of these developments shape and determine the monetary policy trajectory and RBI’s own stance? The stance and trajectory is to give confidence to the market that we have what it takes to handle the kind of issues that have emerged lately including the current account deficit. The stance is giving confidence to the market, giving confidence to the rest of the world, giving confidence to our producers and investors that this we can handle it. Are we finally nearing the end of the NPA resolution process? I have no doubt that the measures that are being taken by the RBI and the government will ensure that NPAs do not go beyond the point that it had gone earlier and that we would gradually reduce it. I am talking about the word gradual because if you take a very strong action just now, then that would have a greater pressure on our economic growth prospects as well. But we can handle it. We could have handled it a little earlier than we did but now we have the main instruments with which NPAs can be reduced and the government is already taking steps. The Indian bankruptcy solvency law is very positive law from that point of view. We are less than a year away from general elections now. Will the government give in to populism or will it succeed in keeping a firm focus on macro economy, these are questions that are haunting the minds of investors and stakeholders alike? I should not comment on that part. That is for the government to decide. Elections are elections but in the sense that the economy also makes a lot of difference to the trust in the government. So, the management of the economy is just as important as management of the electoral population in terms of subsidies, etc. I am sure that action would be taken to make sure that our economy does well.
Read more: economictimes.indiatimes.com