Rupee Rebound From Two-Year Low Fits Rajan's Currency Truce Call

  • India's currency has risen 2.6 percent so far this month
  • `Beggar my neighbor' tactic will foster instability: Rajan

Reserve Bank of India Governor Raghuram Rajan called for an overhaul of the global monetary policy system and again urged against competitive currency devaluations.

His comments come as the rupee climbs toward its best month since 2014, ascending from a close brush in February with a record low. Global finance ministers and central bankers reiterated last month pledges to refrain from manipulating exchange rates to their own advantage, at the Group of 20 meeting in Shanghai. India has “never tried to gain in trade at the expense of our partners,” Prime Minister Narendra Modi said earlier this month.

“Both advanced and emerging economies need to grow in order to ease domestic political tensions,” Rajan wrote in a column titled ‘New Rules for the Monetary Game’ for Project Syndicate. “If governments respond by enacting policies that divert growth from other countries, this “beggar my neighbor” tactic will simply foster instability elsewhere.”

Rajan’s comments in the piece, dated March 21, are similar to those made during his March 12 speech at an International Monetary Fund meeting in New Delhi, when he proposed a new set of international rules to assess monetary policy that includes using color codes to rate how beneficial measures are to global welfare.

Justifying Policies

Steep losses in global equities and surging exchange-rate volatility at the start of the year fueled calls for the world’s biggest economies to do more to stoke demand and bolster stability. The European Central Bank and the Bank of Japan are essentially trying to push down the values of their respective currencies with the use of negative interest rates, former Bank of England Governor Mervyn King said Monday in a Bloomberg Television interview.

The ECB and BOJ contend they’re not intentionally aiming for weaker currencies with easing policies aimed at boosting growth and inflation.

“As matters stand, central banks in developed countries find all sorts of ways to justify their policies, without acknowledging the unmentionable – that the exchange rate may be the primary channel of transmission,” Rajan wrote in the Project Syndicate article. “If so, what we need are monetary rules that prevent a central bank’s domestic mandate from trumping a country’s international responsibility.”

The Australian central bank’s attempts to talk the local currency lower last year ran afoul of the U.S. Treasury, which chided officials by reminding them of their commitment to a freely floating exchange rate. The U.S. representative office at the International Monetary Fund in September “expressed concern over the authorities’ public statements on the desired direction of the exchange rate,” regarding Australia, it said Monday in Washington.

Export Slump

The rupee has jumped 2.6 percent this month to 66.72 a dollar in Mumbai, according to prices from local banks compiled by Bloomberg. It fell to 68.7875 on Feb. 26, near a record low of 68.845 seen in August 2013, and is down 0.9 percent this year in Asia’s worst performance.

Exports from India, Asia’s third-largest economy, fell 5.7 percent in February, the 15th straight month of contraction. The rupee fell 0.3 percent Tuesday as most emerging-market exchange rates weakened after bomb blasts in Belgium spurred demand for havens.

The yield on sovereign bonds due January 2026 was unchanged at 7.50 percent in Mumbai, according to prices from the RBI’s trading system. Its close Monday was the lowest since July 2013 and came after the government’s Feb. 29 budget decision to stick to its goal to narrow the fiscal deficit to a nine-year low and optimism the central bank will cut interest rates sparked a rally in local debt.

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