Raghuram Rajan allays fears, says RBI has adequate foreign exchange buffer; calls for more reforms
India will see limited impact of the debt crisis in Greece as it has little direct exposure to the European nation, RBI governor Raghuram Rajan said on Thursday even as he maintained that for a stronger growth back home, more reforms are required.
While the Centre is in talks with banks about injecting capital, it is equally important to ensure that funding for infrastructure projects remains on track, Rajan said.
Addressing a press conference after a board meeting of the apex bank in Chennai, Rajan said: “I would say the economy is picking up. We see some signs of capital investment picking up. There is a continuing need, which the government is trying to address, of putting some of the stalled projects back on track.”
He, however, said subdued exports, primarily on account of global factors, remain an area of concern.
Enough forex buffer
Even as there was no immediate end in sight to the Greece crisis, Rajan said the RBI has enough buffer of foreign exchange to contain any impact on the currency.
“The Greece crisis will result in an initial burst of volatility. Foreign exchange buffers are fairly reasonable,” said Rajan. “India’s direct exposure to Greece is very limited; the exposure is only via exchange rates. Greece is an evolving situation. (Any) untoward development in Greece could lead to risk-off trade.”
Willing to let foreigners hold more debt
The RBI is open to allowing foreign investors to hold more of the country’s debt and will review investment limits twice a year. “We have broadly decided to look at limits twice a year and we just have to fix the date of the appraisal,” Rajan said. “We are committed to a steady expansion in the absolute value of FII participation.”
Foreign institutional investors exhausted the $30 billion limit in government bonds in August 2014 and have been picking up corporate debt since then. The limit in corporate bonds is $51 billion and FIIs have used up 77% of it.
Policy makers are considering ways to ease investment while looking to shield India from volatility sparked by the Greek crisis or a potential increase in US interest rates.
Last week, finance secretary Rajiv Mehrishi said the government may express the investment limit in rupees instead of dollars. At the current exchange rate, the cap amounts to $24 billion, he said. A hike in investment limits could help cap the rise in bond yields seen for the last several weeks.
The benchmark 10-year bond yield has risen 22 basis points since June 1 and ended at 7.80% on Thursday. Rajan said the government is in talks with Euroclear Bank SA and Clearstream Banking SA on a plan that would make it easier for foreigners to trade the bonds while keeping transactions within India.
“One of our worries was that if we allow the trading to go abroad, it would take away liquidity from domestic markets,” he said. “Recently, they came up with a proposal that would leave trading in the domestic markets, which looks quite reasonable.”
While FIIs have been net investors in government bonds for over a year now, they began selling debt May onwards on the back of concerns over the Greece crisis. FIIs have sold $550 million worth of bonds since April.
More reforms needed
Stating that the Indian economy is in the process of a steady recovery, Rajan said, “Would we want to (grow) faster?
Yes, obviously. But we have to work in the areas of bottlenecks and areas where we need reforms to ensure that growth is strong and sustainable.”
‘Closely watching monsoon’
On inflation and its implication on the policy stance, Rajan said: “Inflation is always a matter of concern. The news on monsoon front has been good so far. But it is something that we are watching. What we have said is policy stance is contingent on the day, and we are watching the data. We have to watch for the progression of data as we see it.”
“IMD thinks it will weaken in next 2-3 months. There are private forecasters who thinks it won’t. Let us see what happens. Forecasting is a difficult job and it’s a little noisy at this point,” he said.
He said exports are an area of relative weakness but they have been weak across various Asian economies and the RBI and the government will continue to take structural measures to improve the economy, he added.
Re-capitalisation of PSBs
Rajan said the government and the central bank are in discussions over recapitalisation of public sector banks.
“I should also mention that the government has been in discussion with us but also thinking of adding more capital to the banks and that will help because it will give them a buffer,” he said. It would also allow banks to take some decisions that may imply that they would need to use some of that capital for cleaning of the balance sheet, he said.
Banks’ asset quality a concern
Rajan acknowledged that the asset quality of banks continues to be an issue. “We are working with the banks to ensure that they recognise the problem early and take actions to remedy. Clearly, the government has to play a role here as well by helping resolve the stuck projects and that is being worked on,” said Rajan.
He added that the RBI is tracking the implementation of schemes, such as 5/25 refinancing, to ensure they are not used for unsustainable projects. A number of infrastructure companies are seeking such refinancing from banks.
PSB heads soon
Rajan also said the government will soon appoint new heads of major public sector banks. “The government is seized of the issue — the need to move quickly on the appointment process… Now we are very close to the announcement, but the final word on that has to come from the government,” he said.
* India’s direct exposure to Greece is very limited; the exposure is only via exchange rates. RBI has enough buffer of foreign exchange to contain any impact on the currency
Higher FII participation
* RBI is open to allowing foreign investors to hold more of the country’s debt and will review limits twice a year
* We have to work in the areas of bottlenecks and areas where we need reforms to ensure that growth is strong and sustainable
Capital for PSbs
* The government and the central bank are in discussions over recapitalisation of public sector banks to give them additional buffer
Asset quality a concern
We are working with the banks to ensure that they recognise the problem early and take actions to remedy
Rains, so far so good
Inflation is always a matter of concern. The news on monsoon front has been good so far. But it is something that we are watching