Fed Tapering, Increasing Hot Money: Rajan Rules Out 2013 Repeat
Mumbai: Reserve Bank of India Governor Raghuram Rajan said on Tuesday that though the country may get impacted by the spillover effects of the loose monetary policies in advanced economies, the economy is well prepared to cope with it.
"Will we be immune to volatility, the answer is no. Everyone is affected by volatility (but) we are in a much better position (today). But after the first wave of volatility when market participants stop to think, I am hopeful that we will look much better than perhaps competitive countries," Mr Rajan told reporters during the customary post-policy interaction here.
Late last month, the European Central Bank (ECB) had announced a fresh $1.1 billion bond-buying programme even as it kept its interest rates at near zero levels. Similarly, the Swiss central had for the first time lifted the 4 per cent cap on franc against the euro, and the Japanese central bank is pumping trillions of yens into the market.
Mr Rajan said the country's high foreign exchange reserves, which crossed $322 billion for the first time in the past reporting week, will provide a cushion.
In its sixth bi-monthly monetary policy review, the RBI said, "Financial markets remain vulnerable to uncertainty surrounding monetary policy normalization in advanced economies and a possibly weaker growth in China and oil exporting emerging market economies."
Mr Rajan said the country has made important strides in a few macroeconomic variables like growth, current account deficit, inflation and fiscal deficit.
"Our growth has not plunged as low as some of our comparative countries; the current account deficit has improved, inflation has come down, which is one of the reasons for the stability of the rupee," the RBI Governor added.
When asked whether the market has priced in the coming tightening rate cycle of the Federal Reserve, Mr Rajan said, "I am not sure that we know fully the process the Fed will follow."
On the rupee, Mr Rajan said it would be wrong to say the rupee has become uncompetitive as there are different estimates of what the appropriate exchange rate is.
"If we just add inflation, we get a sense that our REER has appreciated quite a bit, if we couple that with productivity growth over time, then the appreciation is significantly more moderated," Mr Rajan said.
"But it is a risk which we have to keep in mind going forward with the massive amounts of quantitative easing going on in the rest of world. There are possible dangers of us becoming uncompetitive of that dimension," he warned.
Stating that the RBI does not intervene in foreign exchange market to achieve a particular level for the rupee, Mr Rajan said the RBI has intervened in both directions in recent months.
Joining the RBI Governor, his deputy Urijit Patel termed the current wave of QEs as the age of competitive depreciation and "beggar thy neighbour" monetary policies, which according to Investopedia is policy means through which one country attempts to remedy its own economic problems with those means that tend to worsen the problems of other countries.
