Forbes India 15th Anniversary Special

RBI guv reassures markets, but non-committal on rate cut

Rajan feels India is in a good position despite continued volatility

Salil Panchal
Published: Aug 24, 2015 03:03:19 AM IST
Updated: Aug 24, 2015 03:15:12 PM IST
RBI guv reassures markets, but non-committal on rate cut
India’s central bank governor Raghuram Rajan, allayed fears of investors about weakening global conditions while addressing a banking conclave in Mumbai adding, “As India strives to regain its place in the ranks of prosperous nations, we must remember that what sets poor nations apart from the rich is not people or resources or even luck but good governance, which comes from strong frameworks and strong institutions.”

RBI governor Raghuram Rajan on Monday sought to reassure investors about the country’s current macro-economic health amid weakening global market sentiment.

“Many of you watching markets this morning are worried about the continued volatility from last week. While I don't want to opine on the future direction of markets, I will say that, relative to other countries, India is in a good position with strengthening growth, a low current account deficit and narrowing fiscal deficit, moderating inflation, low short term foreign currency liabilities and very sizeable exchange reserves relative to imports and liabilities,” Rajan told a banking conference.

India’s benchmark 30-share Sensex plunged 1,103.4 points or 4.03 percent to 26,263.07 points in morning trade, as global funds sold amid fresh concerns of a China-led global economic slowdown. The partially convertible rupee fell to a new two-year-low of Rs 66.61 to the dollar intraday Monday.

Rajan told the gathering that they were eyeing the interest rates situation closely.  

“I am sure many of you are interested in what we will do next on policy. For that, I think the best summary is still our last policy statement, from which I quote, ‘Significant uncertainty will be resolved in the coming months, including the likely persistence of recent inflationary pressures, the full monsoon outturn, as well as possible Federal Reserve actions,’ ” Rajan said.

“As the Reserve Bank awaits greater transmission of its front-loaded past actions, it will monitor developments for emerging room for more accommodation,” he said.

The clamour for an interest rate cut from business leaders and economists has been growing louder in recent weeks as inflation based on the consumer price index (CPI) slowed to 3.78 percent in July, its lowest on record. India’s finance minister Arun Jaitley has, in recent weeks, reiterated that conditions are right for rates to come down.

The RBI meets next on September 29 to decide on monetary policy.

“I have said in the past that the central bank is not a “cheerleader” for the economy. By this, I did not mean that the RBI does not want to do its utmost to see the economy do well. Far from it. What I meant is that it is not the role of the central bank to elevate sentiments unduly, to deliver booster shots to the stock market so that it can soar for a while, only to collapse when reality hits,” Rajan said.

“Rate cuts should not be seen as goodies that the RBI gives out stingily after much public pleading. Instead, what is important is sustained low inflation, something the Prime Minister emphasised in his Independence Day speech, and rate cuts are a natural consequence that the RBI has no hesitancy in delivering,” the governor said.

Commenting further on inflation, Rajan said: “What better time than the current for an inflation-prone country like India to bring its inflation finally in line with the world’s? With commodity prices declining and astute food management by the government, part of our work is done for us, without India having to undergo the kind of extreme demand compression that was seen in the Volcker disinflation.”

He said the fragility of the world economy was precisely because “it has focussed on quick fixes rather than deep reform”. “As India strives to regain its place in the ranks of prosperous nations, we must remember that what sets poor nations apart from the rich is not people or resources or even luck but good governance, which comes from strong frameworks and strong institutions.”
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