New Delhi: India’s depleting foreign exchange reserves are likely to be shored up through a credit line offered by developed nations, such as the US, as part of the plan for a new international financial architecture that is currently being negotiated among G-20 (Group of Twenty) nations in the wake of the global financial crisis.
The negotiations for the planned new financial architecture, popularly referred to as Bretton Woods II, are meant to create a structure that will stabilize the financial system and foreign exchange markets of important economies, which have experienced liquidity shortages for companies and crises among financial intermediaries in the last few months, government officials and a minister familiar with the matter said.
A foreign exchange expert said the move wouldn’t help much. “I don’t see the logic in it,” said A.V. Rajwade. “You might as well sell your holdings of US Treasury. In any case, for all foreseeable contingencies we have enough reserves.”
According to the minister in Union government, who did not want to be named, one of the proposals in Bretton Woods II envisages India being given a credit line by the US or the European Union by treating the country’s existing foreign exchange holdings in dollars or euros as collateral. The Reserve Bank of India (RBI) would have the option of using the credit line to support its foreign exchange and monetary policy measures, the minister said.
The G-20, an informal forum created in 1999 that comprises some of the largest economies in the world, will provide a platform to create a new financial architecture. India’s finance minister P. Chidambaram is to attend a meeting of his G-20 counterparts over the weekend in Sao Paulo, Brazil. The Sao Paulo gathering will be followed by a meeting in Washington DC on 15 November of the heads of G-20 countries. Prime Minister Manmohan Singh is scheduled to attend this meeting.
Some details might emerge out of the weekend meeting, Montek Singh Ahluwalia, deputy chairman of the Planning Commission, said. According to people familiar with the development, Ahluwalia has been entrusted by the Prime Minister with critical work relating to India’s negotiating stance at Bretton Woods II. He is being assisted by former chief economist at the International Monetary Fund (IMF) Raghuram Rajan, two officials, who did not want to be named, said. Rajan was appointed honorary economic adviser to the Prime Minister on 3 November.
Two’s company: Montek Singh Ahluwalia (left) has been entrusted by the PM with critical work relating to India’s negotiating stance at Bretton Woods II. Raghuram Rajan (right), recently appointed honorary economic adviser to the PM, is expected to help him, according to people familiar with the development. Ramesh Pathania / Mint
The move to create a new financial architecture has come out of the contagious effect of problems in the mortgage market in America, which has resulted in the collapse of several financial institutions in the US and Europe and grown into a global credit crunch. In India, the crisis has taken the form of a shortage of money and a sharp fall in the local currency against the dollar. RBI has had to simultaneously combat the rupee’s decline, by about 17% this year, and the liquidity crisis. A consequence has been an 18% decline in the country’s foreign currency reserves to $244.04 billion (Rs11.67 trillion today) between 25 July and 31 October.
Suggestions to create a new financial architecture in the wake of the financial crisis have come from people such as French President Nicolas Sarkozy to Nobel Prize winning economist Joseph Stiglitz.
“This is a Bretton Woods moment where we ought to face up to not just the immediacy of the money (issues), but use this as an occasion to make some of the changes that we have needed for a long time and recognized,” Stiglitz said, according to a 6 November report in Reuters.
Bretton Woods in the US was where discussions on a new financial architecture took place towards the end of World War II in 1944. Out of the discussions emerged global multilateral institutions such as IMF and the World Bank and an obligation among participating countries to maintain exchange rates within fixed values in terms of gold. The system unravelled in 1971 when the US, facing high inflation and a rising trade deficit, unlinked the dollar from gold.