Don\'t expect to see fullfledged currency war: C Rangarajan

Dr C Rangarajan, chairman of Prime Minister's Economic Advisory Council and former governor of RBI, to discuss the issue.

 Below is a verbatim transcript of the interview. Also watch the video.

Q: With regards to the external environment, what several people are calling the potential of a currency war breaking down or breaking out?a race to the bottom?how de-stabilising do you anticipate this could be to the global growth situation and what implications could it have for India?

A: If that is all-out currency war, it will be very damaging to the world economy. The growth process, which is still very slow in the developed economies, will be severely affected and it will also affect the developing economies. But one only hopes that it will not blow into or emerge into a full scale currency war.

Q: This is going to be the focus of talks in the upcoming G20 meet. The US-China debate aside several emerging nations have either imposed some form of capital control or are considering some form of capital control. You had what is going on in Brazil and Thailand?analysts are expecting Taiwan, Korea and maybe even Indonesia to start looking at some for of capital controls. How do you assess the chances of a currency war breaking out? Of course it breaks out like you pointed out, it would be disastrous, but what are the chances currently in your assessment of such a thing happening?

A: I think some compromise will be worked out the G20 meetings. Neither United States not China would be interested in pushing this to the brink. I don?t particularly think that the possibility of a full-fledged currency war bursting on the world economy. As far as capital controls are concerned, that is based on a different set of consideration the emerging markets feel that possibly because of the liquidity available in the world system. There will be more influx of funds into the countries and they are keen and anxious to limit these inflows or to ensure that the impact of these inflows is not too much on the economy.

Q: Coming to India view and starting first with the rupee as well as the intervention issue before going into the capital control?s point of view. We have seen about 5% appreciation on the rupee this year. It?s at mid-44 levels. We have seen one bought of interventions by the RBI last week. What rupee level are you building into your assessment? Where do you think the exchange rate is likely to go and settle, over the short-term at least, considering that the flood of liquidity coming in from some of the developed nations is unlikely to be stemmed in any fashion?

A: As far as the appreciation of the rupee is concerned, it is very much in relation to the dollar. In relation to the other currencies, it has been a zigzag. It is not in any one direction. On the whole, the trade deficit has a tendency to widen and therefore in this particular context we need to ensure that the rupee in terms of the dollar does not appreciate in nominal terms. Perhaps we should say more or less at the same level that we had at the beginning of the fiscal year. Therefore the first step is to ensure that the rupee does not appreciate in nominal terms.

In real effective terms of course the rupee has appreciated. That is precisely because of the high level of inflation in this country. Only when inflation in India comes down very substantially, the real effective appreciation can be stopped. But in nominal terms, I would suggest that the RBI should take such action as will be necessary to ensure that it doesn?t appreciate.

Q: What is that such action? Is it more direct intervention that you are referring to?

A: Yes, if the capital inflows are very large, then the Reserve Bank of India (RBI) should be willing to intervene in the market and accumulate the reserves. But let us also understand that until the end of August the capital inflow into India was not that strong. The addition to the foreign exchange reserves at end of August was very minimal. The surge is seen only in September and in October.

But also let us look at the capital inflows in the context of widening current account deficit perhaps the current account deficit of India in this year will be close to 3% of the GDP. This will be equivalent to something like USD 45 billion and therefore we need capital inflows to finance the current account deficit of that particular order and some addition to the foreign exchange reserves over and above covering the current account deficit will also be needed.

There is still some scope for the Reserve Bank of India to absorb the capital flows into the reserves.

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