Reserve Bank of India (RBI) governor Raghuram Rajan on Friday said redemption of FCNR(B) deposits to the tune of $26 billion, due in October-November, should not be a cause for concern.
The central bank, the governor said, has been taking delivery of dollars over time and therefore should have plenty of additional dollars to repay whatever deposits flow out. “I don’t think at this point of time this event is particularly worrisome for us and we should be able to manage it,” Rajan said via a telephone conference.
The governor said Indian companies had brought down the quantum of their external borrowings and were also better hedged than they had been before. “Remember that if the loans they have taken are five to six years in duration, the issue of repayment in a stronger currency will not arise for sometime, by which time, hopefully, the currencies re-establish into a new equilibrium,” he explained.
Speaking to a television channel, Rajan observed it was too early to assess if Brexit would trigger a global recession, clarifying at the same time that he was not trying to underplay the event. “If you want to be gloomy, you can add a whole string of bad events together – ranging from fissiparous tendency in Europe, some potential recession in the UK and going on to shutting down of trade and constraints on trade in export-oriented economies like Taiwan, Korea and China and consequently a significant downturn in global economy,” Rajan said.
Also Read: Raghuram Rajan speaks
“However, this sequence of events need not play out and it’s possible some discussion, some bargaining or political action could offset the impact of these,” the RBI governor said. “It’s very early days and we should not over forecast what will happen.”
On devaluation of foreign currencies, Rajan said he has been worried about it for the last year and a half and had been fairly public about this concern. “Now, I don’t think anybody would argue that Britain engineered exit in order to depreciate the pound, it’s a consequence of this mass movement. These have consequences across the world.”
He added that since the Japanese yen has appreciated hugely, Japanese authorities would be worried what it means; but currencies do help adjustments. “I think some movement in currency is warranted. What I have been concerned about is intervention in big way in currency to move it in a particular direction and create a competitive advantage. That central bankers have to get together and ensure that we don’t do it,” Rajan said.
The RBI, the governor stressed, was watching the markets and is ready to intervene if it sees them becoming disorderly. He, however, said the central bank would not stand in the way of an adjustment in the markets.
“We are ready with ammunition if necessary,” Rajan said via the telephone conference, adding that the central bank’s prime objective would be to ensure the markets were functioning. “If there is any disruption and if liquidity is not available from certain quarters, it is fully ready to provide whatever liquidity is needed.” He clarified that liquidity would be provided in both the rupee and dollar markets. The governor believes that since India is less exposed to the external sector compared to many other countries and is not a significant commodity exporter, it may not be hurt significantly if there is a slowdown in global growth.
“The economy itself is on a stronger growth path than elsewhere, and, therefore, after the initial worries about the consequences of Brexit – and I am not saying we will be in any way immune to those consequences – people will look around for places which are relatively less affected,” he said.
The rupee on Friday closed at 67.96 against dollar, its highest single-day decline since August 2015.
India, the governor said, is driven by a fairly large domestic market which should strengthen after a relatively good monsoon. He believes that the country stands out as a reasonable prospect and after the initial concerns money should return here.
On the effect of Brexit on Indian banks’s overseas operations, Rajan said changes in currency values does affect them based on what kind of net exposure they have to different currencies. “But broadly because there have been movements up and movements down unless you are overly exposed to one particular currency, I don’t think immediately there is a cause for worry. Of course we will monitor their balance sheet situations.”
The governor pointed out that on earlier occasions central bankers had played the role of calming markets and provided liquidity in the short run and if necessary. Asked if the Brexit resembles the Lehmann crisis in 2008, Rajan said he does not want to equate the two. “They are fairly different events. But they did provide a lot of accommodation in the Lehmann event. Let us see how things proceed there. It is still very early, we are still getting instantaneous market reactions,” he said.