Rajan:Enough reserves to contain volatility, hints at rate cut

Last Updated 24 August 2015, 08:53 IST
Amid bloodbath in stock and currency markets, RBI head Raghuram Rajan today tried to allay fears saying the country has strong macroeconomic fundamentals and sufficient forex reserves to contain volatility while he also hinted at a rate cut if inflation remains low.

"I just want to indicate that we have plenty of reserves which was USD 355 billion (at the last count), plus USD 25 billion that exist because some of our forward sales. We have got USD 380 billion to play with," Rajan told a banking summit on a day when the rupee plunged below 66.60 and the market tanked 4 per cent, its worst single-day fall in seven years.

"I wish to reassure the markets that our macroeconomic factors are under control as the economy is in much better position relative to many other economies," Rajan told the IBA-Ficci organised banking summit Fibac.

Hinting at a rate cut given the low inflation, record low crude and other commodity prices, Rajan said: "We will strive to give you the lowest interest rates that is consistent with our effort at bringing inflation under control. We are looking at incoming data ever since the last policy to see how things fare out."

Quoting from RBI's August 4 policy document, he reiterated the bank's resolve to keep inflation under control and help boost growth with a low interest rate regime.

"Significant uncertainty will be resolved in the coming months, including the likely persistence of recent inflationary pressures, the full monsoon out-turn, as well as possible Federal Reserve actions. As the Reserve Bank awaits greater transmission of its front-loaded past actions, it will monitor developments for emerging room for more accommodation," Rajan quoted from his August 4 speech.

Stating that low current account deficit, fiscal deficit discipline, moderate inflation, low short-term foreign currency liabilities, and very sizeable base of forex reserves make our economy better-placed relative to many others, Rajan said, "we will have no hesitation in using our reserves when appropriate to reduce volatility in the rupee."

On yuan devaluation, Rajan said the Chinese move is the result of the extraordinary monetary policies that been going on across the world.

Rajan said the extent of depreciation of the yen and the euro in recent months suggest that the turmoil in the currency markets that has been in the making. China is just the last step in that and comes from Asian countries.

"What you have seen in the last few days is that the euro and the yen have strengthened considerably even when the dollar has weakened against them. One of the things you must remember when you look at the rupee is that we keep looking at the dollar and say the rupee is weakening against the dollar, but the dollar has also moved across all other currencies," Rajan argued.

Noting the strengthening of the rupee against the yen and the euro, Rajan said "we don't look as bad as many other currencies and in fact we have strengthened quite a bit over the last year and a half because of the nearly 20 per cent depreciation of the euro. Similar is the case with the rupee and the yen."

Pointing out that we must look at the real effective exchange rate (REER) value of the rupee against a number of countries, he admitted that when the rupee moves too fast and too far, it creates problems in either direction.

"If the rupee strengthens too much then it creates problems for exports and there is certainly a vocal room which has, in the last few weeks, been taking about the rupee being too strong. And, you are absolutely right in saying if it weakens too much, it creates other problems such as imported inflation and so on.

"So we have to be balanced. What we have said again and again is that we don't try pick the value of the rupee but we try and prevent undue volatility. And, I want to repeat that again that if we see undue volatility, we have the resources to deal with that," Rajan assured the market.

To a question on the bloodbath in the market and whether he expects the free fall in the US and the Chinese market to continue, Rajan said "I think few expected the Chinese move. Now, given that it has become a focal point for markets to adjust, there was a sense that markets have been going up for sometime without correction and when that happens it seems that people get nervous.

"We have to absorb this volatility... but as far as our economic fundamentals go, they are good and they will re-ascertain themselves eventually after certain amount of turmoil. And when they do that reassessment they (foreign investors) will see that India is a good place to be.

I feel fairly confident that the turmoil will settle down and at that point we will be a good investment destination again," the governor said.
(Published 24 August 2015, 06:05 IST)

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