We imported savings – did not export them – RBI Governor Subba Rao
India did not contribute to global imbalances. Indeed we ran current account deficits for the last two decades except for a brief period during 2001-04. In other words, we imported savings, did not export them. However, India's integration with the rest of the world over the last decade has been remarkably rapid. First, let us look at trade integration. The two way trade (merchandize exports plus imports) as a proportion of GDP doubled from 20 per cent in 1998/99, just after the Asian crisis, to 41 per cent in 2008/09. Our financial integration was even deeper as measured by the proportion of total external transactions (gross current flows plus gross capital flows) to GDP. This ratio much more than doubled from 44 per cent in 1998/99 to 112 per cent in 2008/09. While the crisis transmitted to India through both the trade and finance channels, the latter was by far more significant in terms of the intensity of impact.
How do we manage global imbalances ? It is argued that if the US Fed had refused to supply the incipient demand for liquidity in the late 1990s and early 2000s , higher interest rates could have prevented the borrowing boom and the follow on widespread deterioration of financial standards and the subsequent melt down. But this also would have meant lower growth in the US and the rest of the world. The short point is that even as macroeconomic imbalances should not be allowed to proliferate, it is necessary to balance the need for global economic growth against the disruptions which follow the unwinding of such imbalances.
Inflation targeting: I n the years leading to the crisis, central bankers had nearly declared victory. They had found the holy grail of stable growth, low inflation and low unemployment through a rule based monetary policy that targeted inflation rather than monetary aggregates. The much celebrated Great Moderation had delivered. The crisis at once hurt the central bankers' pride and shattered their confidence as the Great Moderation unravelled. Monetary policy was found wanting in delivering financial stability. The undoing was the reluctance or failure of central banks to acknowledge increasing asset prices.
From RBI Governor Subba Rao's JRD Tata Memorial lecture at ASSOCHAM .