It’s very close to action time on cap flows: Nomura MD

The second phase of quantitative easing in the US will pump $600 b into the global economy and a major chunk of this expected to flow into the fast-growing emerging economies. While Brazil and China have already put in place curbs to check inflow of ‘hot money’, Indian policymakers feel there is no need for such controls.

Robert Subbaraman , MD and chief economist, Asia at Nomura Securities , feels India needs to act fast to curb capital flows.

Excerpts from an interview with ET bureau on the sidelines of the World Economic Forum in New Delhi.

There seems to be some sort of setback to global economy?

Actually, the US data has improved, partly due to quantitative easing. Dollar has weakened and equity markets have rallied. But in Europe sovereign debt concerns have escalated. In China and other parts of Asia, inflation and asset price concerns have increased. Overall, it is still tricky.

Since quantitative easing II, policy challenge outside the US have increased. Challenge for Europe is to increase growth rate. For Asia and Latin America, capital flows are big concerns. And for the big commodity importing countries, which are mostly Asian, how to deal with the rising prices is the big challenge.

Where are you in the debate on capital flows in India?

It is getting very close to time to act. There is a case for tighter fiscal policy, case for slowing down capital flows. India’s situation is different from other countries in that it has a current account deficit. India does need capital, but it needs a different type of capital, like stable foreign direct inflows.

We also need to appreciate that India’s fiscal situation is worse than any other country in the region. It is also facing rising commodity prices, and the rupee is appreciating because of capital flows. Both these can cause current account situation to deteriorate. My concern is that at some stage investors may begin to focus on risk more than growth and capital could start to flow out.

What is your assessment of the G-20 meet?

The outcome could have been a lot worse. The divide in terms of currencies, in terms of dealing with capital inflows, in terms of discussing how you should rebalance the world economy were very huge. There was an agreement that the IMF should play a bigger role as watchdog, and I think we will start to see more of that.

The G20 was able to agree to further reform of the financial sector, talk about the proposed financial warning system. When it comes to exchange rates and imbalances, I think it has moved away from being narrowly focused on exchange rate to being a little bit more broadly focused on current account balance. That is a welcome step although not much was decided in terms of exact numbers.

There are many ways to balance the current account, exchange rate is just one of them. You can do lot, like China has done, to boost domestic demand. And that can be done through investments or reducing precautionary savings to help spend more on imports. The coordination is still not as good as it should have been.

What are the risks if the attempts at coordination are not successful?

If there is no cooperation then you can get protectionism through trade restrictions or action on capital flows. What I have to say is that at the end of 2008 and early 2009 when every one was worried about the depression global coordination was lot easier because every one knew you had to loosen policy. Today global coordination is more difficult because some countries are easing policy while others are tightening.

Some countries are worried about deflation while some others are worried about inflation. So I think it is more tricky, but arguably now is the time when you need the cooperation the most. Some countries are faced with a lot of pressure on their currencies to appreciate. And if there is no cooperation you can get protectionism, either through trade or even through foreign capital flows.

Commodity prices are rising rapidly. Food and energy prices are starting to go up. If there is no cooperation, it will be in the interest of individual countries to impose interventionist policies. But that is bad for the global economy.
name-deepak kumar jha