The current account deficit must not be dependent on short term capital flows,believes former RBI governor Bimal Jalan. In an interview to Surabhi,Jalan said the rupee crossing 60 against the US dollar should not be a source of panic but the government must take decisive action to improve investor confidence. Excerpts:
Is there a need to be worried about rupee breaching the 60 mark against US dollar?
I dont attach any importance to this as there is hardly any difference between the rupee at 59.90 against the US dollar or 60.01. But markets are like that. My personal opinion is that we should not fix any target for the rupee. Instead,the government must work to do what is in the countrys best interest and take steps to improve the market confidence.
Also,we need to differentiate between short-term and medium-term capital flows. While market expectations of the economy are based on the short term,the government has to think in the medium term on issues like growth and current account deficit (CAD) that need at least a six-month horizon. Increasing investments is necessary but would take three to four years to have an impact.
Have the markets misunderstood the statement by US Federal Reserve chairman on the US monetary policy?
The international situation is always important,but each country be it the US,UK or Japan,makes decisions based on their own interests. These have some impact on us,in terms of FII flows,etc. But foreign investors also look at our own policies and outlook before investing. The government also needs to realise that there will be some impact of global developments but the market should not be dependent on such reversible inflows. I am in favour of free capital flows but not of a high CAD,which is dependent on financial flows from abroad of a short term,volatile nature. India has the capacity and strength to move forward in the long term.
Will the better-than-expected CAD in 2012-13 help improve market sentiments?
What happens in the foreign currency markets is essentially linked to expectations based on the ground realities and government policies. That is why market expectations are very important and they have been proved right by the CAD data. I hope that the government will take decisions to further provide confidence.
Will the current direction of reforms help revive rupee?
There is no doubt that if we take decisive action,the market sentiments will improve substantially. But the action has to be coordinated,it has to be strong,it has to be firm and anticipated. The government has to take policy decisions to moderate the market expectations and divert them in the direct it wants to. If you want depreciation,then you should say so that I am not going to intervene. If you dont want excessive depreciation or appreciation,then you have to show that you mean it.
Will financing the CAD be difficult?
We need to focus and tackle the CAD and this could require tough action. Some difficult decisions have already been taken like hiking oil prices and gas prices. Curbs on gold have also begun to help. But the government must be firm on the two real problems at the moment the trade deficit and the fiscal deficit.