Russia-Ukraine war an opportunity for rupee's internationalisation: SBI's Ghosh

With much of the world concerned that the Russia-Ukraine war may stall economic growth, India, too, has been trying to ensure the conflict has minimal impact on its economy. In a recent article, Soumya Kanti Ghosh, group chief economic adviser at State Bank of India, wrote that the Reserve Bank of India (RBI) and the government must rely on unconventional policies to navigate the economic uncertainties that may emerge from the war.  

In an exclusive interview to Moneycontrol, Ghosh spoke about how India should seize the opportunity afforded by domestic political stability and the conflict in Europe to push the rupee’s internationalisation. Edited excerpts from the interview:  

Do you think there could be spill-over effects of India following an unconventional monetary policy?

Given the large size of the government borrowing programme, with inflation running at more than 6 percent and growth still recovering during a time when the war has created uncertainty, the central bank is not in a position to raise rates immediately. Thus, it needs to look at unconventional policy responses, but (at the same time) it needs to take cognisance of the fact that system liquidity is not so much in a surplus mode that it can fuel speculation.

Regarding spill-over effects, the central bank has been very conscious of the fact that liquidity modulates in the desired fashion. Due to the uncertainty, the liquidity normalisation, which was getting to the desired pace, has been disrupted in February and March, so I believe it is important to take these steps at this point of time so as to manage overall macroeconomic stability. Thus, there is no need to be too much concerned about the spill-over effects.

India has a large number of crypto investors and crypto may have a role in the war. Can it affect Indian crypto investors? 

I don’t think investors need to have any such fear...the government of India has mentioned very clearly that it is going to tax all sorts of crypto transactions at the rate of 30 percent. Currently, the central bank is working on a digital currency and hopefully, the introduction of the digital currency tool will be able to take care of the financial stability risks posed by the crypto market. So, there is hardly any chance of financial instability being caused through the crypto market due to the war situation. 

Will India alone adopting unconventional monetary policy help calm markets unnerved by the war?

Unconventional monetary policies are always specific to the country itself. While India could adopt such a policy, it may not be appropriate for other countries. Therefore, every country has its own unique position. So, the monetary policy a central bank will be implementing in a country would be in consonance with the particular objectives of the central bank in the particular country. However, an unconventional monetary policy could also be supplemented with some out-of-the-box thinking (to push the internationalisation of the rupee).

... we all know that the US dollar is the reserve currency and no currency has been able to replace the dollar. That is the reason why every country finds it difficult to diversify its foreign exchange reserves. The Chinese currency has also not been able to do it because there is an element of trust factor. The European Union currency also failed to do it. 

Given the fact that India currently is in a position of political stability, India can use this opportunity to get into some sort of trade agreement with some countries like Russia that could bypass the dollar. So, the intention of the Indian currency can be to use the current conflict as an opportunity. There is no harm for India to try and push its currency for internationalisation across borders. It will help the country’s future prospects.

Can an unconventional monetary policy affect foreign direct investment (FDI) in India and cause capital outflow?

I don’t think there could be such a risk. During the pandemic when the FDI inflows declined in Asia, India continued to receive a significant amount of the FDI and a large part of that went to the start-ups. Thus I think there is no such one-to-one causation between capital flow and FDI.

The capital flow from foreign countries is also a function of the macroeconomic stability of the country and also is a risk of sentiment globally. Given the fact that the Fed is likely to raise rates this year, there could be a reversal of capital flows from the emerging economies due to higher rates. This factor is more important to be addressed rather than the fact that unconventional monetary policy could steer capital outflow.