High rates can destabilise capital flows. Stiglitz explains why

New Delhi: Criticising the Reserve Bank’s tight monetary policy, Nobel prize winning economist Joseph Stiglitz today warned that rising interest rate could result in “destabilising” capital flows from abroad.

“Raising interest rate generate flow of capital (from abroad) that could itself be destabilising. So, unfortunately they (RBI) will have to be very careful about instruments they use to fight inflationary pressure,” he told reporters on the

sidelines of a public lecture at Jawaharlal Nehru University.

The Reserve Bank, he said, was drawing a “very delicate line” to deal with the problem of inflation by raising interest rates.

In its bid to contain rising inflation, the central bank has raised key policy rates 13 times since March 2010.

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Interest rates have gone up making India attractive for foreign capital and inflation has continued to remain at near double-digit mark. It was 9.72 percent for September.

Answering questions on eurozone sovereign debt crisis, Stiglitz said the European Union has not dealt with problems in Greece in a timely manner.

“When the euro currency was founded, most economist found it as an extremely difficult project. They have taken away interest rate and exchange rate power but did not put any mechanism in its place. They were very slow to deal with the Greek crisis and now the crisis seems to be spreading. The steps they have taken may not suffice to address the very deep problem that they face,” he added.

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Worried over the global economy slipping into double- dip recession, the G-20 leaders at their summit at Cannes in Paris on November 3 and 4 will try to come out with some solution to deal with the sovereign debt problems in Europe.

The issues concerning “destabilising” capital flows and the need to impose Tobin Tax were discussed during the meeting of G-20 Finance Ministers and Central Bank Governors, but no decision could be taken because of differences of opinion among member countries.

Tobin tax refers to levies on flow of cross-border capital. G-20, a grouping of rich and developing nations, has been at the forefront in resolving the global crisis which began in 2008 with the fall of America’s iconic investment banker Lehman Brothers.

The second global crisis is looming large and several experts, including RBI Governor D Subbarao had emphasised that time is running out for solutions.

Subbarao in his intervention at an IMF meeting in Washington in September had said, “We are rapidly running out of solutions. The two big flash-points are: renewed anxiety in the US about recession, and the deepening of the sovereign crisis in the euro area.”

PTI