Global imbalances may affect domestic interest rates: FM

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, Finance Minister P Chidambaram said at a seminar on "A shared responsibility: Fixing global payments imbalances" at the Asian Development Bank's (ADB) annual meeting.

"The current issue of global imbalance should be viewed on a broader perspective. It should be addressed in such a manner that benefits of global integration continue in an uninterrupted fashion. Risks involved in the disorderly adjustment of global payment imbalances could trigger world recession," he cautioned.

"Any abrupt and disorderly adjustment to global imbalances could result in volatility in the level and cost of capital flows with direct implications for the emerging market economies (EMEs)," he said.

The finance minister also pointed out that it was generally agreed that disorderly adjustment could not be ruled out.

He added that although India does not depend on the international capital market for financing fiscal deficit, the fiscal position of the government could be indirectly affected by the fallout of global developments.

Similarly, any abrupt adjustment in global imbalances may affect corporates, banks and households though the impact may be less than in some other Asian economies.

"Corporates that have borrowed at variable rates could suffer more compared to those which have taken loans on a fixed rate basis. Corporates, which have hedged against currency and interest risks may escape the adverse impacts," Chidambaram said.

With regard to banks, he said should there be a reversal of capital flows, asset prices would decline sharply exposing them to credit risk.

Although Indian banks had their deposit base predominantly in rupees and their investment in foreign currency stock was not large, they had been financing in assets, home loans and the retail market as well as equities.

According to Chidambaram, the current global imbalance was reflected in large mismatches across the world. The US current account deficit stood at $805 billion and global economic growth continues to depend heavily on growth in the US.

With the US also being the world's largest importer accounting for close to 20 per cent of global imports, he said the impact would be especially marked for countries with large export orientation and strong dependence on US markets. This would have an adverse impact on global trade, GDP and employment.

Chidambaram, however, emphasised that as the Indian economy's growth was driven by domestic demand, it would be less vulnerable if the world economy slowed down on account of global payment imbalances.

In his opening remarks, ADB President, Haruhiko Kuroda, said there was a connection between the global macro economic situation and domestic reforms. Japan's Finance Minister, Sadakazu Tanigaki, said structural reforms helped stabilisation of the financial system in Japan.