In the middle of an ongoing currency war between the US and China, Prime Minister Manmohan Singh on Friday asked the G-20 nations to avoid competitive devaluation and advocated that any resurgence of protectionism be resisted.
"We must at all costs avoid competitive devaluation and resist any resurgence of protectionism," Singh said, addressing the Plenary Session of the G-20 Summit that opened this morning.
While the US wants China to appreciate its currency yuan in line with market forces, the Chinese government is resisting the move, as it would hurt the country's exports.
The currency war has prompted the US to weaken their currencies by pumping in more funds into the market.
Although India advocated the case for exchange rate flexibility, it did not support the US line of putting a cap on current account balance, proposed at four per cent of the gross domestic product (GDP).
India's argument has been that it may not be easy to reach agreement on sustainable current account balances for individual countries, given the structural differences of economies.
"Exchange rates flexibility is an important instrument for achieving a sustainable current account position and our policies must reflect this consideration," the economist-Prime Minister said in his speech that was heard with rapt attention by world leaders, including US President Barack Obama.
Besides Obama, Chinese President Hu Jintao, British Prime Minister David Cameron, Canadian Prime Minister Stephen Harper, French President Nicolas Sarkozy and German Chancellor Angela Merkel are some of the world leaders attending the Summit.
The Prime Minister further added countries with high foreign exchange reserves "have a special responsibility to ensure their monetary policies do not lead to destabilising capital flows, which can put pressure on emerging markets".
China has the highest foreign exchange reserve at over $2.5 trillion, followed by Japan at about $1.1 trillion. The other countries with high foreign exchange reserves are Russia, Saudi Arabia, India, South Korea and Brazil.
As regards the advanced economies with high deficit, Singh said, "(they) must follow policies of fiscal consolidation, consistent with their individual circumstances so as to ensure debt sustainability over the medium term. This means that fiscal correction need not be frontloaded everywhere."