Global imbalances: the perspective of the Reserve Bank of India

The pre as well as post crisis discourse on global imbalances has largely focused on the zero-sum current account equation involving United States on the one side and the rest of the world (ROW) on the other. Most of the analysis has been from the perspective of the countries which are perceived to be integral part of the above equation. However, the implications of the imbalances went much beyond these few countries and had profound influence on the financial stability and monetary management in many countries. The huge cross border capital flows during the pre crisis period, arising from the liquidity glut in advanced economies and abetted by the expansion of the financial sector balance sheets, posed significant challenges for domestic policy makers. It is this peripheral perspective that this paper attempts to bring forth. India is indeed a peripheral country as far as global imbalances are concerned as it did not contribute to either the origination or propagation of the imbalances. Its growth process is not dependent in any significant measure either on external demand or capital flows. It does not pursue a policy of achieving a particular level of current account deficit or surplus to support its growth strategy. Its exchange rate is essentially market determined and it does not pursue an explicit policy of reserve accumulation. However, India did face the impact of global imbalances as a receptacle of global funds flow which were essentially volatile in nature. The paper articulates the policy imperatives that arose in this context and the design of policy framework that helped in addressing the challenges. The response was, and continues to be driven by a non-doctrinaire, pragmatic approach with the sole objective of maintaining broader macroeconomic and financial stability.The paper concludes with a discussion on the potential risks to global financial stability on account of persisting global imbalances and the feasibility of post crisis efforts being pursued globally at various multinational fora to address these.