Chief Economic Advisor Dr Kaushik Basu gives his exit interview to CNBC-TV18's Aakansha Sethi where he says that it is not only the Indian rupee but all emerging market currencies which are currently under pressure.
We have seen this happen after Wal-Mart and Carrefour came into China to Indonesia they began exporting, small producers began exporting to the world much more than they were doing in the past. So I think a lot of good things will come from this.
Q: There are several short-term measures the government can use; there are structural changes that can happen. As an economist, what do you think is the most prudent strategy at this point in time?
A: Broadly there are two classes of things that you can do when the exchange rate is moving. Given that India has a floating exchange rate, we don’t control it by the government or the Reserve Bank announcing the rate in the morning, it floats. There are two moves; one is that the RBI intervenes by selling dollars if you want the rupee to appreciate or buying up dollars if you want the rupee to depreciate. Dollars or euro or Australian dollars, I mean couple of these stronger currencies used to do that.
The other one is Indians give them greater access to foreign money that way more dollars will come in, more euro will come in. We have made moves on both these fronts; RBI has acted off late of selling dollars to sort of push dollars down.
The government has taken decisions like opening up - QFI investors into India can now put in their money. ECB borrowing we have expanded and we even allow them to go to China and do some borrowing on this. So, the idea is you allow more foreign money to come in, the value of foreign money goes up and the rupee value goes up.
But there are limits to how much you can do. I personally believe that a part of the exchange rate movement is market driven and you have to live with it. It’s hard, especially people who have borrowed money without hedging in the past, they have been hit very badly. But a part of this you have to live with. When there are big fluctuations you go in with one of these two steps and you try to correct for that.
Another thing, we have to be realistic. This is my calculation; I am not giving you anything official over here. Over the last two years, India has been inflating at roughly 10% per annum. The dollar has been inflating at roughly 2% per annum. So, it is only natural that the exchange rate will depreciate; the nominal exchange rate which is correcting from the fact that the rupee has been losing value faster than the dollar. By my own calculation compared to two years ago to now, say two years ago Rs 44-45 now I would have expected it to be between Rs 51-54, roughly in that range.
To expect it to be pulled back to Rs 49-48 is setting a target which you cannot hold back because a lot of things have happened. So, we should be realistic. 56 is far too much depreciation, but we can’t pull it back to 49. So, set realistic targets and do interventions. There are intervention technologies, even when you are selling dollars, how do you sell those dollars, small batches, lump sum, conditional sale, there are lots of details over there and we have seen different countries use different techniques. We need to learn from them and we need to learn from trading.
Q: Is it incumbent on the central bank to manage the situation now? Is there going to be any action from the government?
A: The bulk of the exchange rate is the Reserve Bank’s domain so I am not saying that depreciation is their responsibility, the market does a lot of things. But how you intervene, when you intervene, that is primarily the Reserve Bank’s responsibility. There are a couple of things which you can do. Try to stall some imports into the country because our current account deposit is very large. So on gold we have taken some steps.
Q: You hiked the import duty from about 2% to 4%. Could we expect further action on gold?
A: I don’t know whether there is a position on this. I am not in favour of that. You can’t do these things in huge measures to correct for that. There are reasons for which these things happen. Even the current account deficit when you are controlling your exchange rate is very different from a current account deficit when you are virtually on a float. So current account deficit in 1991 was 3% but those days we had much more restrictions on the exchange rate. So 3% was much more worrying in 1991 than 4% is today which we are at. It is the largest current account deficit India has had.
It is worrying but it is not that worrying because the exchange rate moves up and down unlike what used to happen in 1991. So 3% in 1991 was much direr than what 4% is now. A lot of the shocks are taken by simply the exchange rate moves so part of this is markets behaving badly, a bit of a global currency bubble forming over here but you are just one country in a huge global economy.
Q: On government action there are people who are expecting a sovereign debt issue at some point in time. The government said that that will be a measure of last resort. Is that something the government is considering seriously?
A: That is something that needs to be thought through. You allow dollars to come in because since you floated a bond people begin to put money into it but if you want to make sure that money comes into this bond it needs a bit of a government guarantee. As soon as you give a government guarantee right now you feel very good money begins to flow in but a government guarantee is a responsibility undertaken in the future.
A responsible government like India must respect the guarantee they have given. So once you give a guarantee you are taking a bit of risk of fiscal hammerage in the future so it needs to be thought through. That is a possible action the government could take, but to the best of my knowledge, the decision has not been taken. It is something that we are looking into but you have to remember there are short-term gains but we are taking on long-term cost when we give this kind of a guarantee.
Q: Possibly a similar measure would be raising the FII cap I know you have done it twice in the past but not if in government securities then on corporate bonds is that under consideration?
A: I would personally be in favour of that. It is true even there you are opening up India to more and more flows but India has a strong enough economy. We are going through a rough patch but still we have a robust economy today. Let us not forget that, compared to 15 years ago we had a very strong economy these last eight years India’s economy average growth has been 8.2% per annum, phenomenal by global standards.
Yes, 201-12 has been low, the growth is down to 6.9% but when we say 6.9% is bad that itself shows where we are. We have a strong enough economy and I am in favour of some more action where you allow foreign exchange to come in. Yes, that will cause some turbulence in the future because more money comes in and out but we will take that. We have taken that and as a consequence we are better off today.
Q: We know there are reserves of about close to USD 300 billion. Analysts say it could go between 58 to 60. What would be your estimate and how much space does the Reserve Bank really have to intervene?
A: Even if it does depreciate that much people who think that they will make money though that speculation will burn their fingers. My personal calculation is somewhere between 51 to 54 as a range that we can expect it to and I think even if there are speculative fluctuations it will get back.
Q: What time frame do you expect it to get back into the 51-54 area?
A: I don’t know. There are technical papers, some very good papers which are showing that these speculative bubbles can actually last for quite some time so I can’t give you a time on that as even I don’t know.
Our foreign exchange reserves are right now including gold is USD 292-293 billion. Gold and SDR takes away a part of it foreign currency is about USD 262 billion roughly. Very handsome compared to what we used to have in the early 1990s which would be USD 5 billion but people get used to it very quickly. So now when we think of intervening say, pumping in USD 10 billion which will make some difference but life does not end after two weeks. If you need to intervene for the next two months we have to think of that.
If the reserves keep dropping because we are pumping money in because we already got use to USD 260-280 billion people begin to worry. But there is some room still we can do that and in the long run we have to remember one more thing - what used to look like a very handsome balance USD 300 billion, we had cross USD 300 billion we have come down a little bit, it is not that good anymore because China is close to USD 4 trillion, Japan is above USD 1 trillion and Brazil and Korea have crossed us.
But still I should tell you India is the seventh biggest so we are still a very major holder of foreign exchange reserves. But when I joined the government we were the third or fourth and this is not a nice thing to do to the world but you have no choice. You have to gradually build up your reserves so that you are able to take stronger action.
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