Former RBI governor Raghuram Rajan, while reacting to fall in rupee, said that he was not too concerned about the domestic currency as "it is more a factor of dollar strength rather than necessarily rupee weakness".
“I think the Rupee has been strengthening in real terms for quite some time. The inflation rate has been modest but slightly above world inflation rates and as a result the rupee needs a modest weakening over time," said Rajan.
Rajan believes that the state of emerging markets is way better than what it was in 2013 and that rupee hitting an all-time low is not much of a concern.
Q: How severe does this currency crisis look to you?
A: It is early days and I think the real problem is Turkey is an outlier both in terms of the leverage that has built up over the years and the quality of policy which has been pretty bad. So it maybe an early warning, it maybe something which doesn’t spread more widely because Turkey is special. There are other countries which are in some situation of fragility because they have upcoming elections, they have a large current account deficit, they have a large fiscal deficit but in general, emerging markets (EMs) look a lot better than they looked in 2013 when we had the taper tantrum.
Q: When you look at trouble spots whether it is debt to GDP, external debt, account deficits, political instability, what to you is the most important thing to watch?
A: Clearly the amount of leverage that has built up is a big factor. Turkey has an enormous increase in private sector debt, a lot of it foreign exchange denominated, which is contributing to the problem. But, I would say on top of that, for emerging markets other than the level of debt you want to look at the current account deficit, oil prices have picked up in recent months, of course they are relatively stable right now but some countries are very heavily exposed to oil. Also, I think you want to look at political fragility, upcoming elections. There are some countries, which have very serious possibility of a regime change and that is worth watching.
Q: What about the country you lead the central bank of. The Rupee is now at a record low. Should some of the central banks be taking action?
A: I think the Rupee has been strengthening in real terms for quite some time. The inflation rate has been modest but slightly above world inflation rates and as a result the Rupee needs a modest weakening over time. So, I am not too concerned about the Rupee hitting an all-time low, it is more a factor of Dollar strength rather than necessarily Rupee weakness. But I would say that, broadly you want to look at countries with large current account deficits as well as a high level of debt.
Q: Are you concerned about China?
A: China is undergoing an enormous restructuring of the financial sector. That is happening at the same time as it is engaged in a trade spat with the United States which could have larger repercussions if each side does not back away. So, yes, I am concerned about China because it is doing something which has not been done successfully in the past. It is really trying to clean-up its financial sector fairly quickly and that is going to take a lot of careful work. On top of that we have the trade spat which has come and we also have a generally slowing Chinese economy. So it has to deal with a lot of problems at the same time.
Q: Wrap all of this up together and you basically got a stronger US, Dollar, stock market, economy, and it is making life miserable for a lot of places around the world. You have warned before famously about the Dollar strength and the ripple effect on emerging markets, how does this all end? Do you think the Fed is going to have to switch the script?
A: In 2013 when we had the last bout of volatility, the Fed stayed off raising interest rates for some time. Now it is not clear it can do that right now because we have inflation numbers in the US gaining strength and it is now clear the Fed has luxury of saying we are going to wait and watch for some time. Of course if there is a serious problem in emerging markets, if for example the trade spat gets much more violent in its ramifications, I think then the Fed may reconsider. However, at this point, it seems to me the Fed is set on a path of rate hikes and emerging markets will have to manage which is why you see actions like the Indonesian central bank essentially trying to say yes we have room to do what we need to do, do not worry too much about us, we are in a much better situation than we were before; of course there are exceptions.
Q: What does Turkey have on its menu of options? It cannot implement capital controls, can it, because it is an open economy; that would probably just make matters worse? What would you do if you were leading that central bank?
A: I do not think that is the way to go. For Turkey, it seems to me that the right path is the path of orthodoxy. At this point, basically say we didn’t mean what we said about keeping interest rates low and that is the way to curb inflation. We are going to take control of inflation, that means raising interest rates, having a serious inflation target, bringing more Central Bank independence – I think that would do a lot to stabilise the Lira but it is important that it not be a one-off, it is not about raising interest rates once, it is about saying, inflation at 15 percent is not something we want, we want to bring it down to manageable levels, that will stabilise the exchange rate. For that, here are a set of policies which will ensure that we will do it.
Q: How does all of this add up for global growth?
A: I think as of now it is still a tick down but not a major one. I think what we really need to do is get rid of the uncertainty that is overhanging the global economy and that primarily means the trade issue. If we can take that off the table, there will be much more sense of confidence that China will remain relatively manageable and that this will not spread to other emerging markets and then feed back into the United States. So I think getting rid of the uncertainty over trade is pretty much the one major action we need to take now.