Chief economic adviser Arvind Subramanian warns India of currency wars

Chief economic adviser Arvind Subramanian on Tuesday warned that India needs to respond to aggressive monetary policy easing (interest rate cuts) and currency weakening moves undertaken by China and other countries to keeps its economy competitive.

Mr Subramanian said that for ‘Make-in-India’ to succeed, India needs to keep its currency competitive (weaker). He said that there was scope for RBI to cut interest rates as inflation is under control.

“Monetary and exchange policy should be thought together,” the chief economic advisor said.

Mr Subramanian said that Indian exports have contracted in last few months due to slow global growth and currency weakening moves undertaken by some nations.

“Europe, Japan, Russia and now China are aggressively easing their monetary and exchange rate polices. What that means, is that it is making our economy less competitive. All these actions, when China cuts interest rates aggressively, is going to make their currency weaker which means that our Rupee is going to get less competitive,” he said.

He noted that most countries are trying to keep their currency competitive and cheap.

“At the least, we should take defensive action. We should not allow our currency to become more uncompetitive ….. if we want ‘Make- in-India’ a long term success, I think we need to have to have a very supportive currency policy,” Mr Subramanian said. He pointed out that China accumulated $4 trillion in reserves as it was buying dollar to keep its currency competitive. “So it is a lesson for all of us,” said Mr Subramanian. He said that same has been true most of East Asia as well.

“China is right now cutting interest rate aggressively to respond to its growth slowdown. This is going to make its currency more competitive. So we need to respond accordingly.”

Mr Subramanian said that inflation is expected to remain under control as the government has adequate stocks to deal with shortage of food grains in the eventuality of poor monsoon.

He said that the economy is recovering and there are some signs that it is picking up. “In the short run, the economy needs policy support to boost consumption through cheaper financing, through public investment, and measures to boost private investment and kick start all these stalled projects,” he said.

Mr Subramanian said that growth may have not been commensurate with steps being taken by the government.