Economics, Politics and Public Policy in East Asia and the Pacific
Author: Renu Kohli, ICRIER
The recent depreciation of the rupee has been a costly shock for India’s financial and real economy.
The large and abrupt drop in the currency’s value has negatively impacted businesses and households by pushing up costs in an inflationary phase, increased price uncertainty and volatility, dented economic confidence, and worsened the critical macroeconomic aggregates. Read more…
Author: Renu Kohli, ICRIER
The Reserve Bank of India’s (RBI) hands-off exchange rate strategy has resulted in a missed opportunity to curtail inflation.
Intervention in the foreign exchange market would have helped counter inflation; but the RBI has failed to grasp such a dexterous policy tool. Read more…
Author: R Kohli, ICIER
A combination of structural and cyclical factors has triggered a new wave of portfolio capital flows into emerging market economies.
Incorporating the fresh lessons learnt from the 2008 crisis, the policy toolkit of emerging markets economies has now been expanded to include capital controls. Read more…
Author: Renu Kohli, New Delhi
Any doubts about India’s dependency on cheap dollars to fund its strong growth were dispelled by the welcome accorded to QE2, the second round of quantitative easing by the US. A large payments deficit and significant capital controls sets India apart from other nations that have to mop up the mess of hot money that follows. India naturally welcomes QE2, therefore, and endorsed the continuation of market-determined exchange rates at the recent Group of Twenty (G20) summit. After all, both of these measures are necessary to keep the party going. But as India hops on the capital flows merry-go-round to drive growth, let the speed and spin not blind us to some incipient distortions in the economy.
There is little doubt about India’s growing ability to absorb significant foreign capital; up to US$70-75 billion is no problem, according to senior policymakers. Read more…
Author: Renu Kohli, New Delhi
A current account deficit widening at a furious pace, high inflation, a tightening monetary cycle, foreign inflows driving stock prices and an appreciating currency — these form an unusual macroeconomic constellation for liberalising the capital account.
Yet these beeps have been ignored, even as fresh pastures are opened for foreign investors. This also comes at a time when Western grasslands remain dry, the US Federal Reserve is poised to unleash a fresh round of liquidity, investors are rebalancing portfolios toward emerging markets, and other Asian nations are contemplating capital controls to stem the global tide of hot money. Read more…
Author: Renu Kohli
India’s labour market is in for a vigorous shake up over the next few years. The inexorable march of market forces, and their interplay with the structural and political dynamics of the country, could end up drawing many unemployed persons into the job market.
India is still far from creating mass jobs in large-scale manufacturing. But over the medium term, absorbing such unutilised human capital will help preserve the economy’s competitiveness in an environment of rapid growth. Read more…
Author: Renu Kohli
The debate on exchange rate policy tends to surface during periods of prolonged and undue appreciation. At its centre is the degree of flexibility that is beneficial for the economy as a whole.
The issue is not about following a policy of persistent undervaluation, as occurred in China, but to avoid excessive determination by capital account movements; the shift to a flexible exchange rate regime in 1998 being widely accepted. There is a trade-off between exchange rate deployment to attract foreign capital and macroeconomic stabilisation vis-à-vis growth promotion through exports. Read more…
Author: Renu Kohli, New Delhi
Policy reform is invariably contextual; as is the announcement by the government of India during this year’s Budget, about setting up the Financial Stability and Development Council (FSDC). The council will ‘strengthen and institutionalise the mechanism for maintaining financial stability’, monitor ‘…macro-prudential supervision of the economy…functioning of large financial conglomerates, and…inter-regulatory coordination issues’. In other words, the new entity will be assigned tasks that have largely been the domain of the Reserve Bank of India (RBI).
The recent financial crisis has sparked off an interesting debate in which India has been cited as a remarkable success. Read more…
Author: Renu Kohli
India’s Budget for 2010 is a demonstration of the discipline that global integration imposes upon countries. The modest contraction in the fiscal stance displays a responsible coordination of macroeconomic policies. Its overall message—serious effort at consolidating public finances—manages fiscal expectations positively. Both were necessary to contain rating hawks and reassure markets and investors—the new watchdogs of open India.
This remarkable development is significantly due to the pressures of growing economic openness. Read more…
Author: Renu Kohli
Following the annual central bankers’ meeting at Jackson Hole, Wyoming, in the US, The Economist magazine in its 27 August issue predicts that the global financial crisis of 2008 will be a cathartic event for central banks. The responsibilities of central banks, it suggests, are certain to include financial stability in the future; inter alia, this will not merely broaden the scope of central banking and monetary policy, but will also place greater discretion with central banks, considering that financial stability is difficult to define and even harder to measure.
Put all this together and you get the larger picture: One, it blows the death bugle of the narrow, inflation-targeting central bank that had reached iconic status though never embraced by all. Two, central banking will be anything but rule-based as central banks marry price stability with regulation to give birth to something called ‘macroprudential regulation’.
Author: Renu Kohli
The challenge for a central bank, as always, is to keep inflationary expectations anchored and moderate the rise in long-term rates. During a crisis such as the world is experiencing now, this is no easy feat.
Reserve Bank of India (RBI) governor D. Subbarao recently drew attention to the central bank’s multiple indicator approach in setting monetary policy. This tells us the scope for discretion, and judgement, in framing monetary policy in India and the skills needed to conduct it. The accompanying charts tell us why.