Cut interest rates to prevent currency crisis: Unctad economist

Monday, 24 December 2007, 12:49 Hrs
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Geneva: Lowering interest rates is the only practicable option for a country like India to tide over a looming financial crisis because of a rise in the value of its currency, says a senior economist at a UN trade and development body.

"India has a special problem because it has not only the dollar fall, but faces international speculation due to high interest rates," said Heiner Flassbeck, a director with the United Nations Conference on Trade and Development (Unctad).

"The way out for a single country like India would be to cut interest rates - to bring it down to the US level - so that there is no speculation any more," Flassbeck told IANS in an interview here.

"So as long as developing countries can keep their exchange rate at a very low level, undervalued a bit, it is nice. But if it is turned around, then the next thing that looms and threatens developing countries again is crisis again."

The economist, who works for Unctad's Division on Globalisation and Development Strategies, also recalled the Indian experience of devaluating the rupee in the early 1990s and said currencies can go up due to speculation or policies.

"Once you are back in overvaluation, there is no way out but crisis. Even if the level of reserves may be $1,000 billion as in the case of China, crisis is then unavoidable and can be very costly," he warned.

Flassbeck said India faced a special problem because it had not only to contend with a drop in dollar value but also faced international speculation due to rather high interest rates prevailing in the country.

"The last Unctad Trade and Development Report refers to 'carry trade' - meaning that money is carried from a low interest rate country like Japan to high interest rate countries like India or Brazil - driving the currencies up," he said.

"That is very dangerous because they end up in overvaluation. This is true. May be not yet for India - it is going in that direction. But if you look at Eastern Europe, there are countries that are terribly overvalued," he added.

Flassbeck said that keeping a currency stable, as India did, was also not a desirable scenario, even though people tend to be happy for sometime as imports get cheaper with higher value of their currencies.

"That is dangerous in my opinion because you lose your international markets. You are swamped by imports that you may not want. In Brazil, they are back to the old rates before the crisis."

The senior economist also dwelt on the paradox among policymakers and central banks of lowering the interest rates so as to push growth, while keeping the inflationary expectations under check.

"Inflation is going up a bit, so the national bank wants to keep inflation in check and keep the interest rate high. The only other way is to bring inflation down with non-monetary means - without using the interest rates," he said.

"That is very difficult," he, however, added, and felt that these issues could be addressed at the global level only by a widely accepted institution.

"It has to be done by a certain institution. An initiative in the UN could be very helpful. It is the only body with all the democratic arrangements - more representative and legitimate than others."
Source: IANS
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