India’s finance minister, Pranab Mukherjee, has warned of looming currency wars, as emerging market countries seek to avoid the pressures that come with rising exchange rates.
“If the crisis deepens further and there is greater volatility in financial flows, there is an increased risk of this happening,” he told a conference in Washington yesterday.
“Our view is that if such tensions arise, they should be eased through dialogue, not through competitive devaluations.”
Mukherjee argued that as large emerging economies grow, their currencies should increase both in stature and in value.
“As the contribution [of Bric countries] to world output and economy is increasing substantially, the currencies used in these countries should have to be widely appreciated,” he said.
Currency and growth mismatches have contributed to volatile capital flows that have affected many emerging market nations. But while other large emerging economies have attempted to stem these flows, Indian policymakers said that they had no immediate intention of imposing capital controls.
India is able to absorb the high levels of capital flows it has been receiving, Reserve Bank of India governor Duvvuri Subbarao told the conference.
“At the moment we have a current account deficit and are able to absorb the flows that are coming in,” he said. “We are quite unlike other emerging economies, which are having a problem of excess capital flows.”
Subbarao said the RBI would continue to use a range of “quantity and price instruments” to manage capital flows, “so that they bring the foreign savings necessary for our development.”
He said that using taxation to manage capital flows was “clearly not off the table,” but added: “the question of [control of foreign inflows] is clearly outside any policy consideration at the moment.”
Inflation remains a major challenge for policymakers – its main inflation gauge logged a 9.8% (headline) and 7.6% (core) year-on-year increase in August – above consensus expectations.
The Reserve Bank of India has acted aggressively to combat inflation. Since March 2010 it has raised interest rates 12 times and 500 basis points, slowing growth as a consequence – but without managing to bring down the headline inflation rate.
Economists are divided as to the effectiveness of the policy response to date.
“The high inflationary environment is clearly not going away anytime soon, with underlying inflation pressures firmly in place. Moreover, there are further upside risks to the inflation outlook,” said Leif Eskesen, chief economist for India at HSBC.