Letters: The Fed effect

This refers to the editorial "Preparing for the Fed" (March 23). The unwinding of the US' unconventional monetary policy is uncertain because of its date of commencement and the pace of reversal. The awaited US interest rate stiffening would adversely affect India mainly because of the consequential reversal of capital flow, unhedged dollar denominated liabilities and predominance of the dollar in Indian foreign trade. The inherent structural deficiencies in India's foreign trade and our dependence on the inflow of short-term volatile capital have been making the economy more vulnerable to such exogenous changes.

The structural weaknesses inherent in the real and fiscal sector of the economy limit the policy manoeuvrability in fire-walling the real sector from the brunt of financial sector disturbances. In such circumstances, the Reserve Bank of India's policy tools and options would not be adequate to effectively shield the economy. The government needs to trigger appropriate policy actions to correct the persisting structural imbalances and weaknesses in both the real and fiscal sector.

Biplab Chakraborty Kolkata

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