The Hindu Business Line : Stem the forex flows

Much has been said about the inevitability of death and taxes. Now the financial crisis appears to have gone out of the realm of probability to inevitability. That at least appears to be the backdrop of the Monetary Policy unveiled yesterday. India, like most other emerging economies, has been receiving huge forex inflows much in excess of our immediate needs and beyond what the real economy can absorb. It has been a torrential flow in the last few months. This global phenomenon, at least so far as emerging economies are concerned, has resulted in a huge glut. Left unchecked and untreated, this can have destabilising effects on the economy. No doubt, this is an act of faith in India’s strong growth story. What a journey for our country from non-investment grade to safe haven status. Rating agencies appear to lag behind the investors.

As they say, there are no free lunches. Central banks around emerging economies are distributing this price to earners of forex, general tax payers (interest on MSS bonds ultimately pass through country’s fisc) borrowers and lenders, not to speak of the common man.

Today’s CRR hike is the bankers’ share of this lunch. It looks like a polarised world in terms of winners and losers. But the moot point is how do we stem the flows, particularly those that are in excess of our needs. Otherwise, the possibility of other instruments getting blunt cannot be ruled out.

Picking cues

The Monetary Policy appears to have come of age. The RBI is picking global cues not from US Fed but from the global credit markets. This confidence is not misplaced as our domestic banks and financial markets could ward off series of crises in the past.

The criticism that lax monetary policy ofthe likes of US over the last few years has fed the sub-prime crisis, is not lost on the RBI. The impact on asset prices of these torrential forex flows, particularly during the last few months, makes one wrongly believe that path to prosperity is short and straight. Memories in financial markets are short-lived.

(The author is CMD, Corporation Bank.)

More Stories on : Monetary Policy | Insight | Interest Rates | Forex

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
A ready sponge

Mid-term Review of Monetary Policy 2007-08: Exceptional response

The lull before the storm?

Preserving status quo

In the right direction

RBI’s worry on inflation continues

Stem the forex flows

Banks have to rejig rates

Inflation still the key concern

Maintaining stability

On expected lines

The P-Notes issue