Saturday's downgrade of the sovereign rating of the US by Standard &Poor could also have positive consequences for India, Mr R. Gopalan, Secretary, Department of Economic Affairs, Government of India, told journalists on Saturday.
The positive fallout could be in terms of enhanced capital inflows and depressed commodity prices, he said. Asked if a surge in capital inflows could not be bad (posing problems in currency and liquidity management), Mr Gopalan said that they would not be bad in the current year. This year, India has planned for a current account deficit of 2.7 per cent (which would be met by foreign capital) and the inflow of funds from foreign institutional investors has been subdued, he added. Mr Gopalan was talking to journalists on the sidelines of a function organised by the Loyola Institute of Business Administration here to launch a C K Prahalad Centre for Emerging India.
The US downgrade might depress commodity prices, which would be good for India in terms of inflation control. Noting that inflation, which started as food inflation, had seeped into non-food, manufactured items, he said the situation called for a monetary policy response. The RBI, he said, would take a view on the situation in about six weeks and then would decided if a further hike in interest (repo) rate would be necessary or not.
On the flipside, the negative fallout of the US downgrade would be that dollar denominated loans could turn costlier. Exports could also be affected, Mr Gopalan said.
Policy response
Asked if the Centre had a policy response for the US situation, he said, “You can't have a policy response for every day events.” He said that the Government was watching the situation and was too early to assess what exactly the fallout on India of the US downgrade would be.
Asked for a comment on the issue of government taking over the function of public debt management from the RBI, Mr Gopalan said that it was a “conscious decision” based on the recommendation of the RBI itself.
RBI managing government's borrowing programme was a conflict of interest, inasmuch as the central bank is the authority of managing interest rates, and government taking over that function would “relieve RBI of the dilemma,”Mr Gopalan said.
But this cannot be done over night, he said, adding that the “process is on.”