Falling rupee not a sign of weakness

Cautioning that India’s economic growth rate may fall further, World Bank Chief Economist Kaushik Basu on Monday recommended a “bit of liquidity infusion” to perk up the economy.

This liquidity infusion can come through the fiscal side by restraining Government expenditure cuts for, say, six-nine months, Basu said delivering the 16{+t}{+h} JRD Tata Memorial Lecture in the Capital.

Basu cited the example of Japan, which had recently gone in for stimulus and achieved a spurt in growth rate.

GLOOM OVERPLAYED

The former Chief Economic Adviser to India’s Finance Ministry also asserted that the country’s economic gloom had been overplayed and the current economic situation was definitely not comparable to the 1991 crisis.

“The economic situation is not good. India is nowhere near potential. But the gloom is overplayed. There can be no question of comparing the current situation with the 1991 situation, when we were on the brink of a major crisis. We are nowhere near that situation now,” he said.

The Indian economic situation does not look that pessimistic in Washington, as it is in New Delhi, he added.

In fact, Basu said that India was in a better footing now, on the level of forex reserves, economic growth rate or even inflation, adding that India was now among the top six growing countries in the world.

At the same time, he cautioned that economic growth may not have bottomed out.

He said India was an “extremely globalised” country and felt that it would be much better for it to remain globalised.

FALLING RUPEE

On the falling rupee, Basu said India must use foreign exchange reserves to curb the currency’s volatility (against the dollar).

He, however, warned that policymakers and regulators should not try to buck the trend of exchange rate through use of such reserves.

“I agree there was sudden depreciation of the rupee. But we must not over-react. This should not be seen as a sign of our weakness”.

Part of the reason for rupee depreciation was natural, he said, adding that one must not treat exchange rate as a measure of “Machismo” of a country.

Basu’s remarks came on a day the rupee sank 2.3 per cent to end at a new low of Rs 63.13/dollar. It hit a record low of Rs 63.22 earlier in the day.

The World bank chief economist’s observations also came close on the heels of Prime Minister Manmohan Singh’s remarks over the week-end that the country needed “fresh thinking” on economic policies.

srivats.kr@thehindu.co.in

(This article was published on August 19, 2013)
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