As rupee falls, IMF wants India to keep up policy efforts

Saying that the falling rupee presents India both a challenge and an opportunity, the International Monetary Fund (IMF) wants New Delhi to continue its policy efforts to reinvigorate the economy.

"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," Gerry Rice, director of IMF communications department, told reporters Thursday.

Asked if the IMF was having any discussions with New Delhi about supporting its economy amid speculation about India possibly selling its gold reserves to the IMF to prop up its currency, Rice said he did not want to "speculate on any support or programme needs" for India.

However, in his view "the combination of large fiscal and current account deficits, high and persistent inflation, sizable unhedged corporate foreign borrowing" among other things had clearly affected market confidence in India.

"Reliance on portfolio inflows are longstanding vulnerabilities that have now been elevated as global liquidity conditions tighten," he said "and this clearly has affected market confidence".

Meanwhile, writing in the New York Times, Simon Johnson, a former IMF chief economist, suggested 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," he wrote.

But the Reserve Bank of India's "signalling of its intentions is likely to become clearer, with some tightening of policy, including modest interest rate increases," following the appointment of Raghuram Rajan as the new central bank governor, Johnson wrote.

"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," he said.

"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)," Johnson wrote.

"You can wring your hands about this system as much as you like," he wrote. "But this is the way the world works, and this is how it will work for the foreseeable future.

"The message is borrower beware, always. As the United States heads toward its next crazy confrontation over the federal government's debt ceiling, heavily indebted emerging markets face serious risks," Johnson warned.

(Arun Kumar can be contacted at arun.kumar@ians.in)