What does 2010 hold for global economy?

Published on Money Control, Source : CNBC-TV18, Jan 09, 2010. – … Here is a verbatim transcript of an exclusive interview with Arvind Subramanian on CNBC-TV18. Also watch the accompanying video … //

… Q: Do you think that serious dollar weakness is over and done with? Or is this incipient trend a decoy and the dollar strength is something that will vanish very quickly?

A: As an economist, I can say that the current level of the dollar, you know the dollar has declined substantially over the last eight-nine months, leaving aside little blips here and there. The dollar is kind of close to equilibrium value. On the basis of fundamentals, one can say that the dollar shouldn’t be either certainly not appreciating too much, or certainly declining too much either.  

I feel confident about US Federal Reserve not going to tighten prematurely. Ben Bernanke is a great student of ‘The Great Recession’ and one of the mistakes of ‘The Great Recession’ back in the 1930s was that policy was tightened too prematurely. This is a mistake that he’s unlikely to make. So I don’t see monetary tightening happening anytime soon in the United States. Therefore, that’s another reason why I don’t see the dollar appreciating significantly anytime soon … //

… Q: Do you think a deluge of foreign capital is likely to be one of Indian Central Bank’s biggest problems or boons in 2010? How would you, therefore, predict the central bank behavior in terms of rate tightening, at least in the next six months?

A: There is no question that India is going to experience a continuous inflow of capital. The magnitudes are greater than India can easily manage. So it’s going to be a real headache for the RBI because a lot of capital is going to come in. If China does not allow its currency to appreciate, that’s going to make things much more difficult for us.

One of the ways you cope up with the capital flows is by allowing our own currency to appreciate. If our currency appreciates and the Chinese currency depreciates, our exports and our domestic industry will suffer. So that’s the tension for the RBI. Now the question is how is it going to respond? It’s going to respond by using a number of policy instruments. There will be a little bit of allowing the currency to appreciate, and there will be a little bit of intervention like what happened in 2007.

Q: How the Reserve Bank will generally act on rate tightening? Do you expect the central bank to start tightening as early as this January credit policy? … (full 2 pages interviev text).

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