It is high time to re-examine the inefficient subsidies carefully, especially subsidies like oil. Low oil prices give an opportunity to roll back the subsidy, according to Raghuram Rajan, a former chief economist of the IMF.
?The rupee is fairly convertible as now-a-days RBI does not intervene much in determining its value. The country needs both inflows and outflows of capital. Inflows have a limit. In my view, these are minor constraints,?? said Rajan, the Eric J Gleacher distinguished service professor of finance at the University of Chicago?s Graduate School of Business, while delivering a lecture titled Fault lines: Hidden fractures still fracture, still threaten the world economy at the reserve Bank of India headquarters in Mumbai.
According to him, large current account deficit makes countries like Brazil and India vulnerable to the same set of problems that the industrial countries faced recently or the emerging markets faced in 1990s.
He reiterated what RBI, in one of its report last week, said, ?The exchange rate of the rupee is susceptible to the debilitating influence of large capital movements, especially during crisis periods, in view of the large current account deficit.
?Since the depth of the Indian financial market is relatively less, such volatile capital flows can impart significant volatility to the rupee,? the report had said. ?We have to be careful of our monetary policy becoming overly expansionary. It is time for being fairly circumspect about the policy, given that countries like India, Brazil and China are in the global spotlight. Don?t oblige the world by adding to the policy impetus by the government,? Rajan, who now advices the Prime Minister on policies , restated.
Growth in emerging markets is the solution to global problem. But emerging markets should not go on a spending spree just because other countries are financing them. These markets have to worry about the inflationary pressure that is building up and is likely to pose a bottle-neck in the growth process, he said. Explaining the current global scenario arising from the crisis in Europe, he said, ?If Europeans don?t react, there could be a freeze in inter-bank market. This freeze could lead to something that could transmit easily to emerging markets.?
