With the rupee breaching the 63 level against the US dollar,World Bank chief economist Kaushik Basu on Monday called for a two-pronged strategy including the use of foreign exchange reserves and temporary liquidity infusion through higher government spending to stabilise rupee and spur growth.
The recent depreciation in rupee was sudden and sharp and needs to be addressed. Some strategic intervention by the Reserve Bank of India is needed through buying and selling of dollars. Also to use a certain amount of (forex) reserve to buy and sell is a good idea, said Basu,adding that this signals to the markets that the government is willing to use its forex reserves.
Basu,who has earlier worked as the chief economic adviser to the finance ministry,also stressed that the government should try to infuse liquidity in the market as a temporary measure for six to nine months to boost demand and growth. At this point of time,government expenditure should not be curtailed too sharply as we want demand to pick up…liquidity buys some time which must be followed by deep reforms, he said at an Assocham seminar.
With the volatility in the currency markets,the central bank can not be entrusted with liquidity infusion as its interest rate regime is more delicate and has to focus on the rupee,he said. While stressing that the current situation can not be compared to the economic crisis of 1991,Basu,however,said that the economy is likely to grow at about 5 per cent in the current fiscal.