Although the global outlook has turned dangerous with recessionary clouds, balance sheets of corporate India and banks are much stronger now, as the country has been a “conspicuous exception”, said HDFC chairman Deepak Parekh on Tuesday.
“I don’t worry about India’s macros, despite growing pressure on the current account deficit or the gloomy global environment. Many of the India’s high frequency indicators are all doing well,” Parekh said at an Indian Chamber of Commerce event here.
According to him, the Reserve Bank of India has been “extremely prudent” in the exchange rate management as the country has never seen a free fall of the rupee. The present currency depreciation is not a reflection of a change in the fundamentals of the Indian economy, he pointed out.
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“No doubt, the impact of the dollar strength has been harsher for emerging markets. The dollar strength triggers the risks of taper tantrums and sudden large outflows of capital can have a destabilising effect on trade and finance. Forex reserves of many countries have shrunk, partly with central banks defending their currencies and largely due to valuations changes. For instance, with India, our forex reserves which peaked at $642 billion in October last year is now at $528 billion. Our import cover currently stands at 9 months compared to 15 months earlier. In 2013, at the time of the taper tantrum, India had an import cover of 6.5 months. In 1991, India had forex reserves just for 15 days. Fortunately, the present situation does not warrant a warning alarm,” the finance industry veteran said.
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Little choice for RBI but to raise repo rate
It is a ‘tough’ task for the RBI to balance growth and inflation as there is little choice for the central bank now but to increase the repo rate, Parekh said. “It is a tough balance that RBI has to follow. If you increase interest rates, it slows down growth. If you do not increase rates, it increases inflation. RBI has a comfort zone on inflation, and we have crossed the comfort zone on inflation in India. So, there is little choice but to increase the interest rate. But I am sure the approach of the RBI, knowing the state of our development, they will not follow Fed and increase rates by 75 basis points. They will do cautionary increase and not destabilise the economy and they will prudently balance growth versus interest rate hike.”