Current account deficit at sustainable levels; India has ‘buffers’ against shocks: RBI Guv

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Ensuring price stability through monetary policy and current account deficit at sustainable levels have enabled us the build-up of “buffers” against unforeseen shocks, according to Reserve Bank of India Governor Urjit Patel.

“Alongside the current account deficit remaining within sustainable levels, other indicators of external viability such as the ratios of indebtedness to GDP and/or reserves are also reflecting a healthy improvement. The government has pursued the path of fiscal consolidation and the ratio of public debt to GDP is gradually declining. International investors have warmed to where the Indian economy is currently positioned and this is reflected in sizeable foreign investment inflows,” Patel said, speaking at CAFRAL Conference on “Financial System and the Macroeconomy” last week.

Meanwhile, he added, domestic financial markets have shown resilience and stability in spite of escalation of global geo-political uncertainty and heightened volatility in financial markets. These developments have enabled the build-up of “buffers” against unforeseen shocks, he said as per his written speech available on the RBI website.

Lauding the government for its efforts on corporate governance, Insolvency and Bankruptcy Code (IBC) to resolve stressed assets and the Rs 2.11 lakh crore recapitalisation plan for public sector banks that will ensure that flows to productive sectors (and credit-worthy borrowers), Patel said the Indian economy is at an important juncture.

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“Our recent growth numbers may have disappointed some in the first quarter of this fiscal year, but the second quarter has recorded an uptick and the slowdown may well be bottoming out,” he said, adding that if one sees far, structural changes like the Goods and Services Tax (GST) that come with temporary disruptions can be growth and efficiency-augmenting in the medium to long term.

However, the RBI Chief pointed out, the “movement of capital in and out of the country is often linked to policy cycles in other countries which throw up the challenges of international policy spillovers. With every new tail event, the churn becomes larger, the volatility ever higher, threatening to overwhelm the modest defences that emerging markets are able to muster”.

Domestic risk vs International policies

Placing India against international backdrop, Patel called for protection of policy independence as India – like other emerging markets. It has benefited from globalization but “also more exposed than before to vulnerabilities that come in its wake”.

“Our increasing dependence on the external world is reflected in outstanding external liabilities (both debt and non-debt), which increased from about 30 percent of GDP in March 2005 to 41 percent of GDP in March 2017. India’s net international investment position (i.e., outstanding assets minus liabilities) has moved over the period from about –7 percent of GDP to –17 percent of GDP,” the RBI chief said.

Patel added that emerging markets that are at the receiving end of global financial turbulence, are systematically denied access to such risk sharing.

He further said that the time has come to end this “sectarian approach and to make the access to swap lines equally available rather than only for the privileged”.

While emerging markets have shown a degree of resilience to the turmoil of recent years, they remain vulnerable to liquidity and bridging financing gaps that are debilitating even if transitory, Patel added, leaving the attendees of the event to deliberate on the role of central bankers and policymakers in managing inflation, monetary transmission mechanism, look at asset bubbles endangering financial stability or think of the use of foreign exchange reserves as short-term interventions or long-term policies.