Mumbai: Reserve Bank of India (RBI) governor Y.V. Reddy said on Friday that policymakers the world over are cooperating with each other to “get out of this highly uncertain time”.
“The major source from where the comfort has to come is the United States and from all indications, the policymakers in the United States are already keen to bring the normalcy as soon as possible,” Reddy said on the sidelines of a function organized by RBI where Mauritius central bank governor Rundheersing Bheenick delivered a speech on capital flow in Mauritius.
“I think there is very demonstrable determination among the central bankers to cooperate as much as possible to get out of this highly uncertain time,” Reddy said.
Stating that much of the high oil and food prices and financial problems around the world are not entirely unexpected, Reddy said: “Our policy (monetary policy in January) had recognized that there could be pressures from food…oil. The policy also indicated there could be pressures from financial problems. In some senses much of what is happening is not entirely unexpected. Yes, the magnitude sometimes is very difficult to guess,” Reddy said
The comment is significant as the oil and food prices have already pushed the inflation to a nine-month high of 5.11% for the week ended 1 March. This is the second week in a row when the wholesale price index crossed RBI’s comfort zone of 5%.
In 2007, inflation was 3.8% but now the oil price, which touched a record $111 (Rs4,495) on Thursday, and increasing food prices are deflating the hopes of RBI to contain inflation within its target.
“By and large the uncertainties are there and they are continuing. But As of now, it is not very clear when things will get normal or a little less abnormal,” Reddy added.
On the issue of sharp fluctuations in the currency market, Reddy said that the central bank has always flagged the importance of stock checking to companies and warned them of the fluctuations.
“We have been quite interactive in terms of supervising the situation. So I would say it is good that the sensitivity which ought to be there are coming in more,” Reddy said. Many Indian firms are suffering losses on account of their derivatives deals following the sharp depreciation of dollar against some of the major global currencies.
Bank of Mauritius governor Rundheersing Bheenick, in his address said that as in India, his country is also facing unprecedented capital inflow and managing that is a problem for the small African country.
On the tax arbitrage agreement between Mauritius and India, Bheenick said the central bank has no role to play in it. “The whole issue of tax arbitrage is something which is not within the purview of the central bank. This is basically handled by the administration and tax authorities and the offshore management people.”
Mauritius has a double taxation avoidance agreement (DTAA) with India. Under this agreement, companies once taxed in Mauritius, which has a favourable tax regime, won’t be taxed in India for any investing activities. Foreign institutional investors (FIIs) take advantage of this and incorporate themselves in Mauritius to invest in India. Mauritius also does not levy capital gain tax.
India is particularly concerned about this tax arbitrage as FIIs, despite investing heavily in India and reaping profit, remain out of the Indian tax net.
Recently India wanted an amendment to this DTAA and tax the Mauritius-based companies investing in India.