The International Monetary Fund has commented that the plummeting rupee presents both a challenge and an opportunity to the Indian government, calling upon New Delhi to continue its policy efforts on a variety of fronts.
IMF spokesman Gerry Rice, however, declined to speculate on whether India needs any prop from the multilateral funding institution. Asked about the possibility of India approaching the IMF for assistance, Rice told reporters: “I wouldn’t want to speculate on any support or programme needs. But maybe just stepping back on the situation in India, the combination of large fiscal and current account deficits, high and persistent inflation, sizable unhedged corporate foreign borrowing and reliance on portfolio inflows are longstanding vulnerabilities that have now been elevated as global liquidity conditions tighten, and this clearly has affected market confidence.”
“The current situation presents a challenge, obviously, to the government of India, but also an opportunity for the government to continue in its policy efforts on a variety of fronts,” he added. Former IMF chief economist Simon Johnson, writing in The New York Times, commented that some policy confusion in recent months had compounded weakening confidence in the Indian economy.
“Weakening confidence in the Indian economy has been compounded by some policy confusion in recent months, which has further encouraged domestic residents to move funds out of the country,” Johnson noted. He expected the Reserve Bank of India’s signalling of intentions to become clearer, with some tightening of policy, including modest interest rate increases after Raghuram Rajan takes over as the bank governor.
“Still, there is political pressure to keep the economy growing ahead of elections in early 2014, so we should not expect fiscal policy to tighten,” Johnson wrote, adding: “When a country like India faces crisis, for domestic reasons but also perhaps because of what is happening in the United States, capital tends to flow out of that country and toward safe havens (like the United States).”
As he put it, “You can wring your hands about this system as much as you like. But this is the way the world works, and this is how it will work for the foreseeable future.