LM:Rupee stabilization efforts move to international level
With the rupee losing 24% of its value starting 23 May, despite numerous stabilization attempts, the authorities’ ire is now directed upon the offshore non-deliverable forward market (NDF). Continual shocks from speculative positioning in NDF markets to the onshore market tested the government’s nerves—over 2% depreciation in two steps on 27-28 August witnessed quickening realization of rupee goal posts, which itself slid further down once achieved. But an official’s revelation (Reuters, 30 August) of plans of a coordinated intervention by the BRICS (Brazil, India, China, Russia, South Africa) in the NDF market (denied by Brazil) defies belief.
Apart from the size mismatch—the Bank for International Settlements’ FX committee surveys estimated daily average NDF turnover at $4.7 trillion in October 2011, compared with BRICS’ $4.3 trillion—the rest of the BRICS have little incentive to rally to the rupee’s defence: Brazil has its $60 billion intervention programme plus rollover currency swaps, the yuan isn’t under attack and Russia’s surpluses are shrinking.
True, more than half the NDF trade is pure betting, but surely the viable option is to push harder for regulation at the G20, viz. proposed migration of the shadowy, over-the-counter NDF market to electronic clearing platforms and other reforms, the impact of which will be to push up costs, lower profits and hence, reduce the market’s size.
Another international effort is to remind the United States of its responsibilities as the world’s reserve issuer at the forthcoming G20 summit in St. Petersburg. Here, India is supported by others in the BRICS, who’ve been forced to tighten monetary policies due to the reversing global financial cycle, with negative growth effects. Chances of extracting macroeconomic coordination at the G-20 in this regard—a clearer path of US monetary policy, tied to specific goalposts—appear dim though. Earlier, at the annual central bankers’ conclave at Jackson Hole, Federal Reserve officials had little interest in including spillover effects upon emerging market economies in their monetary policy considerations.
This raises the broader issue of sovereignty of national economic policies: in an unreformed global monetary “non-system”, countries are tied to US monetary policy, in the absence of a truly global reserve currency. The bitter lesson for India is that a floating currency and current account deficits, though helpful for resolving global imbalances (and appreciated at the G-20), hasn’t bought it monetary independence. Research by economist Helene Rey at Jackson Hole showed this holds for the world as a whole; contrary to the theory, there isn’t a macroeconomic trilemma; just a dilemma, so capital flows must be managed.
For a stabler rupee, India has to eventually confront some hard questions: Does higher rupee volatility have any relation with its floating nature, either directly (higher flexibility) and indirectly (by engendering imbalances)? What value has a floating exchange rate yielded vis-Ă -vis a previously managed float that allowed balancing both exchange rate and monetary objectives? Whether, and how, to manage the capital account - through return to reserves accumulation, some capital controls, or a bit of both? Has financial integration raced ahead of trade integration?
Finance minister P. Chidambaram was reported by the Financial Times as wistfully recalling addition of $92 billion to forex reserves five years ago. A reappraisal of past financial and economic policies would serve the rupee much better long-term, rather than international efforts to contain its volatility. Meanwhile, ride this tide with dignity.
