The Hindu : Business : Global imbalances may hit interest rates: FM

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Friday, May 05, 2006

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Business

Global imbalances may hit interest rates: FM

Ashok Dasgupta

Huge mismatch between savings and investments

COURSE CORRECTION: Japanese Finance Minister, Sadakazu Tanigaki (left), Asian Development Bank President, Haruhiko Kuroda (centre), and Finance Minister, P. Chidambaram, before the start of the Governors' seminar in Hyderabad on Thursday. — Photo: Satish H.

HYDERABAD: Even as India is much less vulnerable to economic slowdown as compared to the external demand-driven fast-growing Asian economies, the Finance Minister, P. Chidambaram, on Thursday cautioned that the global imbalances in current account positions could lead to a "spill-over effect" on domestic interest rates, apart from posing challenges in forex reserves management.

Spill-over effect

Speaking at the Governors' seminar at the 39th annual meeting of the Asian Development Bank (ADB) here, Mr Chidambaram said: "There could be a spill-over effect of global developments on domestic interest rates. It could also pose challenges for reserve management as currency values may fluctuate violently."

Mr Chidambaram noted that although India did not depend on the international capital market for financing the fiscal deficit, the Government's fiscal position could be indirectly impacted by to the global imbalance. Going into the genesis of the global imbalance, Mr Chidambaram pointed out that it arose owing to the surging current account deficit of the U.S. to $805 billion in 2005.

The new players in the scene now, he said, were the oil-exporting countries, which had built up huge surpluses, and these nations would have to play a major role in correcting the imbalances. As for India, it was likely to remain in deficit even in the near future, he said.

Detailing the implications of the global imbalances, Mr. Chidambaram said that although the Indian economy "would be affected through several channels,'' the impact of the global slowdown would be much less as it was mainly driven by domestic demand and, therefore, much less vulnerable.

Mr. Chidambaram, however, disfavoured "any abrupt adjustment in global imbalances as it may affect corporates, banks and households'' even though its impact might be much less as compared to some of the other Asian economies. "We feel that our approach, aimed at exchange rate flexibility within the ambit of market determined exchange rate arrangement along with market interventions, essentially to manage volatility and ebb in capital flows, seems to have served us well,'' he said.

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