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India in a Globalizing World Some Policy Dilemmas. Distinguished Speaker Series Cornell University Ithaca, New York August 28, 2012 Dr. Duvvuri Subbarao Governor Reserve Bank of India . 1. India Macroeconomic Situation. Cause for Concern?. 2. 2.

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india in a globalizing world some policy dilemmas

India in a Globalizing WorldSome Policy Dilemmas

Distinguished Speaker Series

Cornell University

Ithaca, New York

August 28, 2012

Dr. Duvvuri Subbarao

Governor

Reserve Bank of India

1

india macroeconomic situation

India Macroeconomic Situation

Cause for Concern?

2

2

what drove india s growth in the pre crisis period

India Growth Story

What drove India’s growth in the pre-crisis period?

4

started fraying beginning with the global financial crisis of 2008 09

India Growth Story

Started fraying, beginning with the global financial crisis of 2008/09

5

from one crisis to another
From One Crisis to Another

Just as we were recovering from 2008/09 crisis, the eurozone crisis hit us.

Policy space to respond to the crisis is much less now than in 2008/09.

6

6

india current macroeconomic situation
IndiaCurrent Macroeconomic Situation

Growth has moderated

Inflation is high and persistent

Balance of Payments under stress

Twin deficits (fiscal deficit, current account deficit)

Investment has decelerated

No policy space for stimulus

7

7

three policy dilemmas
Three Policy Dilemmas

How do we manage the growth-inflation dynamics?

External Sector - how do we manage the short-term trade-offs without compromising long-term sustainability?

Fiscal Consolidation - how to manage the political economy constraints?

8

8

dilemma 1
Dilemma - 1

How do we manage the growth-inflation dynamics?

9

9

what is driving inflation
What is driving Inflation?
  • Food (cyclical + structural)
  • Global commodity prices + depreciation
  • Fiscal deficit
  • Demand pressures

12

inflation and rbi
Inflation and RBI
  • What has RBI done to control inflation?
  • Has RBI succeeded in controlling inflation?

13

13

slide14

Growth - Inflation Risks

  • Global Uncertainty
  • Commodity Prices
  • Fiscal Deficit
  • Monsoon Performance
  • Supply Response

14

dilemma 11
Dilemma - 1

How do we manage the growth-inflation dynamics?

15

15

dilemma 2
Dilemma - 2

External Sector - how do we manage the short-term trade-offs without compromising long term sustainability?

16

16

what is the external sector problem
What is the external sector problem?
  • Large current account deficit (CAD)
  • Financing the CAD with stable flows

17

external sector problem
External Sector Problem
  • Why has current account deficit (CAD) increased?
  • Why have capital flows thinned?
  • What has been the result of this?

19

what is the impact of rupee depreciation

Rupee Depreciation?

What is the impact of rupee depreciation?

21

21

what is the capital flows problem
What is the ‘Capital Flows’ problem?
  • We want capital flows just equal to CAD
  • But they are invariably either too much or too little
  • And they are volatile

23

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capital flows how volatile quickly reversing trends
Capital Flows - How volatile?Quickly Reversing Trends

Pre-Crisis (2005/08) - Great Moderation - Volatile Inflows

Crisis (2008/09) - Safe Haven - Outflows - Sudden exit

Post-Crisis (2010/11) - Volatile inflows - ‘Currency Wars’

Eurozone Crisis (2011) - Confidence Effect - Outflows

24

24

managing capital flows
Managing Capital Flows

Change in world view on capital controls from pre-crisis to post-crisis

25

25

managing capital flows1
Managing Capital Flows
  • Two options
  • Capital Controls
  • Exchange Rate Management
  • No option is totally benign

26

26

26

managing capital flows no benign options
Managing Capital FlowsNo Benign Options

Capital inflows

Do not intervene Currency appreciation

Intervene but Inflationary pressure but do not sterilize

Intervene and Upward pressure on sterilize interest rates

27

27

27

external sector management
External Sector Management

Sustainable Solution

  • Reducing CAD in the medium term
  • Financing CAD in the short-term

29

29

policy dilemma 3
Policy Dilemma - 3

How to manage the political economy of fiscal consolidation?

30

india s fiscal deficit
India’s Fiscal Deficit
  • What is India’s fiscal deficit problem?
  • What are the challenges in fiscal consolidation?

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32