More reports on: World economy

India calls for G20 swap lines to offset impact of US stimulus withdrawal

20 September 2014

India has proposed the creation of currency swap lines among the Group of 20 nations to offset the impact of the withdrawal of the US Federal Reserve`s monetary stimulus programme on capital flows and currencies in emerging economies.

''..The uncertainty and volatility in external environment is worrisome and needs the attention of the G20. As the US Fed withdraws from unconventional monetary policy, there will be an overhang on asset prices in the emerging markets and therefore, volatility in the currency markets. The decision on the exit from the QE programme that came in after the FOMC meeting yesterday had an impact on the currency markets of many of the emerging market economies. The strength of G20 lies in taking international collaborative actions and not limiting to the individual country growth strategies,'' Mayaram said,

This concern was also raised by Mexico.

The Fed indicated on Wednesday that its program of monthly bond purchases to keep long-term borrowing costs low was on course to end next month.

"In order to ensure that the growth outcomes are still achieved, are there solutions that the G20 can explore? Are swap lines a solution?" Finance Secretary Arvind Mayaram asked at a meeting of G20 deputy finance ministers.

"Let us get the IMF to analyse whether it is so," he added, according to an official transcript of his remarks.

''It is possible that the swap facility may never be used as it is more of a confidence building measure, rather than actual ammunition. The benefits to the global financial system could potentially be large as it would reduce the amount of self-insurance that countries need to do. At the same time, if the swap facilities do get used, the benefits would include a reduction in the negative shock to EM and global GDP.''

The collapse of the Indian rupee a year ago when the Fed first warned that it would dial back its programme of the so-called quantitative easing, was the first warning that any reversal of dollar flows exposed the country`s gaping external deficits.

The balance of payments crunch was a first test for Reserve Bank of India Governor Raghuram Rajan, who has since called for rich nations to take greater account of the "spillover" effects of their monetary policies on emerging markets.

He said the swap lines would effectively backstop each other in the event of a run on a country`s currency.

The pleas by Rajan, a former IMF chief economist, reflected growing concern among large emerging markets that the world`s financial architecture operates for the benefit of rich Western countries.

In response the BRICS - Brazil, Russia, India, China and South Africa - have taken steps to strengthen cooperation such as setting up a joint development bank.


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