Is India in danger of another crisis? And could it hold lessons for others?
A weak currency won’t necessarily lead to a crisis. But, if it makes it harder to pay for a deficit that is owed to overseas creditors, that’s when it could become a problem.
That’s what the newly appointed governor of the RBI, the Indian central bank, Raghuram Rajan, and I discussed last year when he was the government’s senior economic adviser.
We talked about the risk that India could experience a repeat of the 1991 balance of payments crisis. The country ended up being rescued by the International Monetary Fund.
There are a few key similarities. India still has a persistent current account deficit – the widest measure of trade that includes investment flows. And a weak rupee doesn’t help with the cost of borrowing to finance that deficit.
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