Global spillover may hit domestic rates

Hyderabad: Global imbalances could affect India’s domestic interest rate as a result of "spillover effect" despite the fact that banks in India had their deposit base predominantly in rupees and their investment in foreign currency stocks was not large.

Finance Minister P Chidambaram told the annual Asian Development Bank meeting here that, "There could be a spill over effect of global developments on domestic interest rates. It could also pose challenges for reserve management as currency values may fluctuate violently".

He said the global imbalance arose due to the rising of current account of the to USD 805 billion in 2005, which was 6.4 per cent of its GDP.

On the other hand Japan and emerging Asia had a current account surplus, which was equivalent to 60 per cent of the US current account deficit.

"Now with rising oil prices, the oil exporting countries, having recorded large current account surpluses, are emerging as new players in the global scene and will have to play an important role in the correction of these imbalances," he said.

As far as India's current account deficit is concerned, Chidambaram said it was likely to remain in deficit in the near future.

Apart from a huge savings-investment mismatch, the other feature of the global imbalance was that exchange rates of some of the major trading partners of the US had not appreciated adequately despite running large and persistent trade surpluses, Chidambaram said.

China is one example where correction and adequate appreciation of its currency value has not taken place despite having a large current account surplus.

Elaborating on the ramifications of global imbalances, Chidambaram said the economy would be affected through several channels.

But the impact of global economic slowdown would be less on India as the country's growth story was driven by domestic demand, he said.

India was less vulnerable because it was not driven by external demand like other emerging Asian economies, he added.

Chidambaram was however against any abrupt adjustment in global imbalances as it may affect corporates, banks and households though the impact may be less than in some other Asian economies.