An International Monetary Fund report (its annual review of India’s economy) advises India to prepare a plan to respond to volatility in global currency markets that may come as the U.S. Federal Reserve continues ‘tapering’
- Says a coordinated plan is needed in case capital account pressures re-emerge
- plan should make rupee flexibility the key defense
- Should include measures to raise the benchmark interest rate, impose cash curbs, open foreign-exchange swap windows and raise diesel prices
- “The principal risk facing India is the inward spillover from a tightening of global liquidity interacting with domestic vulnerabilities”
- Pressures associated with India’s “still-significant external financing need” could lead to higher borrowing costs, fund outflows and “disorderly adjustments” in the exchange rate
“We see India much more resilient than they were about the middle of last year to external shocks,” Paul Cashin, the fund’s mission chief to the country… “But global financial market volatility is still a risk.”
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