The continuing depreciation in the value of the rupee is a direct fall out of the widening current account deficit. Prime Ministers Economic Advisory Council (PMEAC) chairman C Rangarajan is of the view that further monetary steps may be difficult to arrest the rupee fall,but the government can work to attract more foreign investors. In an interview with Surabhi,the former RBI governor said that prolonged problems in the euro zone could lead to another global financial crisis. Excerpts:
What are the reasons behind the sharp depreciation of the rupee?
The sharp fall that we witnessed yesterday was primarily due to external factors regarding concerns about Greece and the euro zone crisis. It was also partly due to the rise in stock prices all over Asia. But we must recognise that the rupee has been depreciating over the last several days. This is largely because of the mismatch between the current account deficit and capital flows,which are proving to be inadequate to fund the deficit and putting pressure on the rupee.
With inflation on the rise again,how effective can monetary policy be in arresting rupee fall?
The monetary policy has already taken a positive stance in the form of cuts in the cash reserve ratio as well as a 50 basis point cut in the repo rate by the RBI. Any further action by the RBI will have to depend on the inflation rate. Though headline inflation is currently driven by food inflation,but till the time it is rising,it will be difficult for the RBI to adopt an easy monetary stance.
Will a prolonged euro zone crisis impact the countrys CAD and currency movement?
The continuing uncertainty in Europe and falling growth would have an adverse impact on exports. Although in recent years our exports have done well despite poor growth in the developed world,it would still be impacted. But this may not be very significant as we now have a diversified export basket. But the crisis could be favourable on our import bill as prices of commodities and crude oil will fall. However,if the euro zone crisis continues,it will lead to further risk aversion amongst investors and impact capital flows.
What are your views on the forecast of a global crisis in 2014?
I dont know why the year 2014 has been chosen for the crisis by many. But what is really worrying is the continued fiscal problems in Europe and the slow pace of recovery in Western countries. This would certainly lead to a slowdown in global growth. Much of Europe is currently in the midst of a debate on growth versus austerity and whether deficit should be allowed to rise up in order to boost growth. My view is that there should be some flexibility on the fiscal deficit in the short term in order to help revive growth but the government should bring out a credible policy of fiscal consolidation in the medium term.