2 / 11 19 / 10 / 2020 deglobalisation, disrupted education and debt : economic policy challenges following the pandemic | deutsche bundesbank more generally, in order to maintain price stability, monetary policy aims to smooth aggregate demand over time by adjusting interest rates. for example, if a shortfall in aggregate demand were to weigh on the inﬂation outlook, the central bank would cut its policy rate or bring long - term interest rates down by purchasing bonds. however, while this mechanism is helping to stabilise the economy, it cannot, on its own, address the economic dislocations caused by the pandemic shock we have witnessed. as economist michael woodford recently noted : “ while it may well be [UNK] for restaurants or theaters to suspend the supply of their services for a period [ … ], the loss of their normal source of revenue may leave them unable to pay their rent ; loss of rental income may then require the real - estate management companies to dismiss their maintenance [UNK] [ … ] ; the furloughed maintenance [UNK] may be unable to buy food or pay their own rent [ … ], and so on. ” in other words, the sectoral shutdowns have disrupted the ﬂow of payments within the real economy and thereby severely constrained the spending of many businesses and households. monetary policy can only help in those cases where liquidity is scarce or interest rates are too high, but it cannot make up for the loss of income due to payments not made. instead, ﬁscal transfers directly address the fundamental problem at hand, since they substitute for lost income. by modelling such a situation of “ effective demand failure, ” woodford spelled out a key economic rationale for rapid and large - scale ﬁscal support in the current crisis. in practice, policymakers in germany and elsewhere have been particularly concerned about the danger of businesses ’ temporary liquidity shortfalls turning into solvency problems. indeed, a recent study found that, across a sample of advanced economies, many small and medium - sized enterprises could fail during the crisis. assuming impaired access to credit and no government intervention, the estimated bankruptcy rate would double from roughly 9 % to 18 %. [ 4 ] a broad wave of corporate insolvencies would likely destroy a large number of jobs and raise unemployment persistently. while this would scar the overall economy, the resulting burden would not be shared equally. indeed, a disproportionately large number of women and low

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 2 / 3 bis central bankers'speeches 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.