The general weakening of currencies across the global markets has been described by Brazil's Finance Minister Guido Montego as a manifestation of an “international currency war” that is threatening to take away his country's competitiveness. Indeed for a variety of reasons, many governments have been pursuing policies which, directly or indirectly, lower the external value of their currencies. The United States and a few other issuers of reserve currencies have embarked on a monetary expansion to check falling domestic demand while a few others, notably China, have intervened to keep their currencies from rising. The alleged “currency manipulation” by China has invited some strong words and, even threats of counter action by the U.S. In the past, there have been currency conflicts and efforts to prevent the situation from getting out of hand. In September 1985, the U.S., the U.K., France, West Germany, and Japan jointly decided to push for dollar depreciation. Even earlier, in 1971, the U.S. abruptly ended the dollar's convertibility into gold, signalling a preference for cheaper currency. What makes the present situation different is the emergence of China as the world's second largest economy. Besides, an agreement at the global level is not easy to arrive at because of the variation in the pace of recovery and the divergence in strategies among the major economies.

India, Brazil, and other emerging economies have had to reckon with a surfeit of capital inflows which, unless properly handled, can threaten macroeconomic management. Brazil has tried a Tobin-type tax, with only limited results. India has traditionally depended on a two-stage intervention by the RBI to check a sharp rupee appreciation. Surplus dollars were mopped up and it was followed, wherever necessary, by sterilisation of excess domestic liquidity. Reducing the volatility of the rupee and building up adequate reserves to guard against risks have been the other objectives. Yet, for reasons that are not clear, the RBI has stayed away from the foreign exchange markets since August 2009. The rupee has appreciated sharply in relation to the dollar. More light on India's apparently contrarian stance might be shed in the next credit policy statement, due in early November. Given the present levels of coordination in international forums, these concerns across the world may not result in currency wars or mutually injurious “beggar thy neighbour policies.” However, since currency-related disputes are but a manifestation of the bigger problem of global imbalances, the ongoing efforts at correcting the imbalances in an orderly way need to be pursued vigorously.

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