Monetary apartheid?

Urjit Patel's argument on currency swaps should be heard

Speaking in Washington DC at a seminar organised by the Group of 30 developing nations, Reserve Bank of India Governor Urjit Patel outlined a new and persuasive case as to how the self-interest of developed-country central banks led to monetary instability in emerging markets. Mr Patel’s language was calculated to make an impression: He said that “some of us would go as far as describing this situation as virtual apartheid, in which systemic central banks protect themselves and their self-interest”. His statement is likely to cause many to look again at the system of currency swaps, which he decried as being like apartheid — which is good because there is much about the system that is wrong.

Mr Patel’s criticism centres on the differences between how central banks in emerging markets such as India and those in the developed world can access dollars. Many swap lines exist between the United States Federal Reserve — which is responsible for the supply of dollars — and its counterparts in Frankfurt, Tokyo, and other developed-world financial capitals. This set of swap lines means that, say, the European Central Bank rarely needs to worry about the stock of dollars that it has in its reserves. On the other hand, emerging markets such as India constantly have to keep an eye on how many dollars they have, especially at times like in 2013, when the current account deficit had turned particularly adverse. Under such circumstances, only a large stock of dollars that has been saved from before can provide security to the economy and prevent a crisis. Preserving this stock of dollars not only causes monetary policy to be rendered difficult but also has a real economic cost to the economies concerned.

In making this argument, Mr Patel goes beyond the argument that his predecessor, Raghuram Rajan, often made about the divisions between monetary authorities in the developed and developing world. Mr Rajan warned that developed-world central banks frequently made monetary policy with little or no thought as to the spillover effects on smaller open economies like India’s. Mr Patel has pointed out that these effects are magnified by the failure to make swap lines accessible to emerging-market central banks. Now that two successive stewards of Indian monetary policy have identified this as a problem, it should not be ignored.

It is important for those responsible for India’s economic diplomacy to hear these concerns, and to raise them with their opposite numbers in the developed world. Mr Patel cannot negotiate with his counterparts directly — he is not supposed to be a diplomat. But his argument needs to be heard and supported by those in New Delhi who are, and by the executive leadership. After all, access to swap lines would demonstrate the maturity of Indian institutions as well as allow the Reserve Bank of India to free up some of its reserves to more productive activity in the economy. These should both surely be major priorities for the government in New Delhi.