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Oct 09, 2013, 01.54 PM IST | Source: CNBC-TV18

Market to react positively to Yellen's appointment: Gokarn

In an interview to CNBC-TV18, Subir Gokarn, Director of Research at Brookings India spoke about the overall economic environment in India and the rest of the world especially US

Subir Gokarn

Director of Research, Brookings India

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In an interview to CNBC-TV18, Subir Gokarn, Director of Research at Brookings India spoke about the overall economic environment in India and the rest of the world especially US.

Below is an edited transcript of the interview on CNBC-TV18

Q: What is your take on the situation in the US right now?

A: Unlike the previous episode in 1995-1996 during the Clinton administration somehow there is a feeling that this one (US government shutdown) is not yet showing signs of convergence. The previous one lasted for some 17 days, constant dialogues, negotiations going on between the Congress and the administration. This time the position seems to be somewhat more rigid, certainly much more confrontational as it looks in the public domain.

It is uncharted territory; very clearly nobody expects this to be a permanent stalemate. That is not even within people’s scope of thinking. However, at the same time, you need to see signs that the two sides are starting to show some convergence, some willingness to find middle ground and so far eight days after the shutdown that doesn’t seem to be visible. We are in a fairly delicate situation. It is very difficult to track the possible trajectory in terms of time and in terms of the resolution and obviously the longer it stays the more it threatens settlement and agreement on the debt ceiling as well.

Q: What is your sense? Would the response come only after the markets really have a heart attack?

A: I don't think there is anybody who is able to make a prediction on this because both sides are not yet showing signs of willingness to converge. It can happen very quickly once decision is made that this might be very disruptive or it may go to the brink and respond eventually to some sort of market instability. I really at this point cannot see a greater likelihood of any particular outcome at this point.

Q: You have been quoted talking about how the Fed chairman will be very important in terms of determining monetary policy. We do know now that Janet Yellen will be most likely heading the Federal Open Market Committee (FOMC) or the Fed Reserve how does that change things for India in terms of a possible tapering timeline and what do you think is the possible impact or the contingency that India needs to plan for?

A: Let us keep in mind that Dr. Yellen’s appointment firstly it has to be confirmed by the senate, it is only a nomination not an appointment. Secondly if she is confirmed by the senate she will take office only in January 2014. There is a lot on the plate between now and then. We have to wait for an outcome on the government shutdown that is the appropriations passage. We have to wait for an agreement on the debt ceiling. All of these are potential shocks to the US economy and by extension to the global economy.

So I don't think we should be even looking at what Janet Yellen may or may not do until we are over this hump. This is a big hump over the next couple of weeks. If we clear that without too much disruption then the association that she has, she has been identified as amongst the more dovish of the FOMC and the markets have generally responded positively to her chances having gone up now of course she is nominated because they feel that she will be somewhat more calibrated on the taper.

This essentially from India’s perspective means more time and that is positive, there is more time to make the necessary adjustments, take the necessary steps on reducing our vulnerability particularly on the current account deficit (CAD), the fiscal deficit, all of the old stories but we have to use that time. It is not just the fact that we have a new Fed chairman is not going to solve our problem, our problems are essentially domestic. But to the extent we have more time to address them I think that is clearly a positive.

Q: We appeared to have used that time somewhat to build defensives on the currency, what is your reading, will it now be better able to weather any market problem when tapering actually happens as well how is this range itself as an academic do you read 60-62/USD there about as the right value of the rupee?

A: Whether as an academic or policy maker I have really had great difficulty in putting a specific number on the currency. The best way to look at it is if our vulnerability is contained and by that I mean that the CAD should be within what we have been considering as safe zone, comfort zone if you will of below 3 percent of GDP or around 3 percent not more than that, then market forces tend to operate reasonably well and wherever the currency finds itself at that point it is reasonable. Of course you can use measures like the real effective exchange rate and so on to determine a fair value but that to my mind is only an indication among a lot of others.

However coming back to the first point which is stability we have from the experience of the past four months going back to the end of May, I think we have to take the message that at this point wherever we are particularly in terms of vulnerability we are extremely suspect to global turbulence. If there is any kind of shock outside it may be because of the debt ceiling or may be something else. Because we are so vulnerable the movement of rupee is very sharp. So what is going to help us there is essentially working towards bringing the CAD down.

Now that is happening to some extent given that exports are picking up and we are seeing some signs of that. The Q1 numbers were not very encouraging but after that the second quarter numbers as most people expect are likely to show some narrowing. So, as long as that is happening, there is a self correction taking place.
We still have some big issues on the minerals front, coal, iron ore, gold and oil. We have to be taking more aggressive steps on all of these commodities.

But at least there is some narrowing of the deficit which is happening as a result of a lower rupee and that will help to reduce the vulnerability. But let us not pretend that it is not there, the vulnerability is still there. 

 

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