India prepared to face Fed rate hike: Rajan

To impact more on countries with high CAD

India is better prepared to handle the impact of interest rate increases in the United States as foreign funds are less likely to desert the country due to signs of an upturn in economic growth, the Reserve Bank of India (RBI) chief said in an interview published on Sunday.

RBI Governor Raghuram Rajan's comments to a newspaper came on the heels of US jobs data which has heated up speculation over when the Federal Reserve is likely to raise interest rates.

Any decision by the Fed to raise rates, which have been held near zero since December 2008, will have implications for economies like India, as it could lead to capital outflows from emerging markets.

That could put pressure on emerging market currencies, particularly those with economies running high current account deficits, as India was last summer when talk of the Fed trimming its monetary stimulus led to a sharp depreciation in the rupee.

India has since taken action to correct its current account deficit and increase foreign exchange reserves. “We certainly have done a great deal of preparation and are in a very different position from the summer of 2013,” Rajan said.

“My sense is that even when the Fed withdraws, people, after an initial bout of withdrawal, may consider India a good place to leave their money.” he added.

Rajan, a former chief economist at the International Monetary Fund, took over the reins at the RBI a year ago, when pressure on the rupee had become acute.

Having weathered that storm by taking by taking steps to boost currency reserves and narrow the current account gap, the rupee avoided a re-run of the crisis when the Fed actually began tapering last December.

Curbs on gold imports, such as higher duties, helped dramatically narrow India’s current account deficit to $32.4 billion in the fiscal year that ended in March from $87.8 billion a year earlier.