B P Kanungo: Trade War - is it a prelude to deglobalisation?
Speech by Mr B P Kanungo, Deputy Governor of the Reserve Bank of India, at the Forex
Association of India Conference, Singapore, 10 August 2019.
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1. I am delighted to be here today and am grateful to the FAI and the organisers of this
conference for inviting me to speak to this gathering. I am also happy to be in Singapore, a
country which truly epitomises all that can be called achievements of globalisation, and a country
with which India had and continues to have multifaceted engagement covering cultural, ethnic
and economic spheres. FAI, a body of forex market professionals who intermediate between the
supply and demand for foreign currency and act as 'price givers' to the rest of the economy has
been active in promoting transparency, professionalism and ethical conduct in the forex market
since 1979. I commend them for the role they have played and hope that they will continue to do
so in future with utmost efficiency and fairness.
2. The forex market is unique in several ways. A foreign currency is essentially a commodity
outside its jurisdiction and therefore has attributes of an asset. But the exchange rate, the price
of the foreign currency normalised to the home currency is an important macroeconomic
variable that ought to be determined by economic fundamentals and influences behaviour of
economic agents. Principally because of this twin nature, the exchange rate exhibits great
volatility and decouples from its value indicated by the economic fundamentals that calls for
policy response. I must add that the only thing next to extreme volatility that disorients a forex
trader is a situation of very low volatility!
3. It is ironical that amidst several disruptive factors, the volatility in the global foreign exchange
markets has been quite low in recent times. In fact, the JPMorgan Global FX volatility Index has
been at its lowest since 2014. Market participants have seen this as a lull before the storm and
have recounted past episodes when such a trough was followed by a sharp rise in the US Dollar.
Despite the 25-basis-point rate cut announced by the US Federal Reserve, the US Dollar rose
sharply, probably anticipating more accommodating measures in the future. If anything, this
underscores uncertainty.
4. The global economic scenario is not very encouraging, though there is no room for pessimism
yet. The IMF continues to revise the global growth projections for 2019 downward though the
outlook for 2020 is more positive. The growth in the developed countries remains sluggish and
the emerging economies including China and India, the dominant contributors to global growth in
recent years, appear to be facing a challenge. Another era of accommodative monetary policy
regime seems to be round the corner as evident from synchronised rate cut by several Central
Banks.
5. Global trade tensions between the two largest economies are a dominant theme of discourse
today. As of now, there does not appear to be any possibility of quick resolution of the tension,
nor does it seem to escalate and get out of hand rapidly in near future. Whatever may be the
rational and economic logic behind the competitive protectionism through tariff barriers, it is
certainly contributing to the global economic slowdown. The exit of Britain from the European
Union, the so-called Brexit also is shrouded in uncertainty and it is recognised that a no-deal
Brexit will surely be a disruptive factor. There are also risks emanating from geopolitical tensions
in the Gulf and elsewhere that can adversely affect the sentiments.
6. Delicately poised as the global economy is at this juncture, much of which, as IMF Chief
Economist Gita Gopinath says, is self-inflicted, it is entirely premature to think of deglobalisation.
Globalisation is an irreversible process and has been progressing for millennia. It has progressed
rapidly beyond expectation in recent times because of quantum advancements in
communication and technology. All aspects of human existence including economies, markets,
social interactions, education and so on have become intertwined. True, the process of
globalisation has brought problems and discontent in its wake, but wisdom lies in addressing
them rather than disbanding the process.
7. Free Trade has been one of the main planks of globalisation. It has been generally held that
free trade amongst nations enhances welfare. The underpinning logic is the same as that in case
of free market economics: specialisation, comparative advantage and productivity gains. Just as
in case of free market economics, there are factors that affect the gains from trade. Besides,
there has always been an asymmetric approach to free exports versus free imports. While every
country favours exports (except when the terms of trades are deteriorating) because it
contributes to domestic employment and growth, there is an abhorrence for imports because the
country loses employment, growth and foreign exchange. This brings in deterrent measures like
tariff and when one hears talk about optimum tariff, it simply means optimum for the welfare of
the country concerned not for the global welfare as a whole. And if all the trading countries
impose retaliatory tariffs, it becomes a negative-sum game affecting global welfare and welfare
of individual nations to a varied extent.
8. Ordinarily, the exchange rate is supposed to play some kind of an equilibrating role in
addressing the current account deficit, subject of course to several preconditions. A country with
trade surplus should experience appreciation of its currency making its exports more expensive
and imports cheaper and vice versa for a country with trade deficit. The success of this
mechanism depends on to what extent the exchange rates are allowed to be determined by the
market forces without intervention of national authorities. It is not surprising that allegations of
currency manipulation were fairly common in the run up to the recent trade tension.
9. The increasing globalisation of trade, manufacturing, services, supply chain, capital
movement, etc. has created a web of complex interdependence. Moreover, the externalities of
national economic policies have also become substantially magnified. While the national
governments and policy makers are supposed to act in interest of their respective
constituencies, the collateral effect of their action on the rest of the world can be significant. The
need for coordinated action amongst the leaders of the larger nations is urgent. It must be borne
in mind that such coordinated action did contribute to contain the global financial crisis.
10. Speaking recently, Governor Das drew attention to the US Treasury's monitoring of countries
as currency manipulators since 2015 in which India figured for some time till 2018. He further
pointed out that the charter of the IMF has elaborate provisions to bind its member countries not
to manipulate their currencies so as to gain unfair comparative advantage in trade and it is best
that the issues relating to any alleged currency manipulation are best dealt with in a multilateral
framework than bilateral attempts to correct a wrong. The same logic applies to trade in goods
and services and other areas of discord as well. That was the purpose behind the erstwhile
GATT, now WTO. The current trade tensions are best sorted out multilaterally through
cooperation lest as Paul Krugman tweeted some time back, "In the long run the world would be
poorer and in the short run there would be immense disruption."
11. The Indian forex markets have been fairly stable in recent months. As you know, the Reserve
Bank is mandated to maintain orderly conditions in the foreign exchange market. Its intervention
in the forex market is solely directed at curbing sudden turbulences not backed by the economic
fundamentals. As has been said repeatedly, market operations are not intended to achieve any
target exchange rate or band of rates. It must be pointed out that the exchange rate dynamics in
India for more than a decade has been driven by capital flows rather than current account
balances. As an aside, India has mostly run a current account deficit, notwithstanding a bilateral
trade surplus with the US, marginally more than USD 20 billion during 2018. Though long-term
flows related to FDI and long-term debt have been fairly stable keeping in tandem with the
economic fundamentals, the portfolio flows have their own dynamics depending as much on
attractiveness of returns of Indian assets as the global factors determining their risk appetite.
Gyrations in the forex market in these circumstances leave no option other than market
intervention to restore orderliness in the market. One also need to bear in mind that India's forex
reserves are borrowed reserves and not built out of export surplus. Inasmuch as it provides a
bulwark against sudden flow reversals, it enhances the country's ability to cope with the fall out
and indeed, contributes to global stability as well.
12. The policy regime is also oriented to providing adequate instruments of hedging to all resident
economic agents who have exposure to a foreign currency as well as all non-residents who have
a Rupee exposure. The onshore markets are fairly deep and liquid but needs further
strengthening. There is a wide menu of hedging instruments available and further expansion
would be in keeping with understanding of their risk implication. In recent times, global institutions
and investors have shown a healthy appetite for Rupee denominated assets, which while
ensuring flow of foreign exchange protects the Indian issuers from exchange risk. This trend
needs to be given further policy nudges.
13. In fine, I would like to say that though there are discouraging portents for the global economy
and uncertainties arising from trade tensions and geopolitical developments, I am optimistic that
coordinated policy response and dispute resolution within a multilateral framework will see us
through the day.
14. I will also take this opportunity to highlight two other important issues. First, the issue of
transparent and fair pricing of foreign exchange transactions which has been brought to our
notice by various category of users. The problem of getting fair prices was especially acute for
MSMEs and small businesses who were not allowed to access the FX trading platforms of
individual banks. In order to address this issue, RBI decided to develop, through CCIL, a
webbased platform wherein such participants could place their purchase/sale orders directly. The
platform, is accessible to users from early August 2019 through an internet-based application,
allows bid/offers from retail clients and Authorised Dealer banks to be matched anonymously and
automatically, thereby allowing complete transparency to the users about the levels of their
trades. Banks will have to declare and recover their processing charges separately leading to
competition amongst banks for customer business. I urge banks to make the platform popular
among retail and small business houses/MSMEs.
15. Second, the Global Forex Code developed by the BIS as a common set of guidance for the
proper functioning of the FX market. It comprises a common set of principles (55 in total with 6
leading principles) aimed at restoring trust and allowing greater confidence in the forex market
and its functioning after various scandals (like LIBOR fixing scandal, etc.) eroded confidence in
the markets. The Code provides the corporate/intermediary with an opportunity to review/improve
its internal FX operations and align them to global standards. It provides a positive signal to its
clients, investors, counterparties and the wider market of the corporate's commitment to follow
good practices while dealing in the FX market.
16. In India, all banks, barring one, and several non-bank participants have signed the Statement
of Commitment (SoC) to the Code. Though the adoption of the code is voluntary, I urge all the
non-bank participants present here to study the Code, examine their processes and, thereafter,
sign the SoC to the Global Code.
17. I wish your deliberations all success.