1. Raghuram Rajan: Rate cuts not goodies, but natural result of low prices

Raghuram Rajan: Rate cuts not goodies, but natural result of low prices

We have $355 bn in reserves plus $25 bn as forward contracts. We will have no hesitation in using reserves, said Raghuram Rajan, RBI governor

By: | Mumbai | Published: August 25, 2015 12:19 AM

Amid a whopping 1.3% fall of the Indian rupee and a near 6% fall in share indices, the Reserve Bank of India (RBI) on Monday assured markets that the turmoil will pass as India’s economic fundamentals are strong and that the central bank has the resources to curb the currency’s volatility through reserves.

“We have about $355 billion in reserves plus another $25 billion as forward contracts, so in sum we have $380 billion. We will have no hesitation in using reserves,” said Raghuram Rajan, governor  RBI while speaking at the FICCI-IBA hosted banking event. “We try and prevent undue volatility and I want to repeat that again that if we see undue volatility, we have  resources to deal with that,” he added.

The Indian rupee plunged to a fresh two-year low to settle at 66.65/$ after the 30-share Sensex tumbled more than 6% on the back of a meltdown in Asian stock markets. The rupee, which had been resilient so far, has lost 3.75% over two weeks after China moved to devalue the yuan by a massive 3% earlier this month.

However, the RBI looked to calm markets and Rajan said that India is in a far better position to weather the volatility given the strength in macroeconomic fundamentals. “All I can say is that in India we have to absorb this volatility.

But be fairly assured that as far as fundamentals go, we are good. After a certain amount of volatility, markets will assess these fundamentals. The turmoil will settle down,” Rajan said. Rajan also said that instead of focusing on the rupee’s fall against the dollar, the currency’s real effective exchange rate has to be looked. The rupee is overvalued by around 12% according a 36-currency basket of currencies tracked by the RBI.

“What we said again and again is that we don’t try and pick the value of the rupee, it floats between these multiple forces,” he said.

Even as the governor sought to give clarity and calm on market turmoil, he refrained from giving any indication of future monetary policy measures. However, Rajan hinted that the government’s food management should help the RBI find room to cut rates.

Stressing the importance of low inflation, Rajan said that rate cuts should not be seen as goodies given by the RBI stingily but rather an outcome of low inflation. “What is important is sustained low inflation. And rate cuts are a natural consequence that the RBI has no hesitancy in delivering,” Rajan said.

The clamour for rate cuts has risen ever since data showed that headline retail inflation fell sharply to 3.78% in July.

The fall in inflation coupled with a massive fall in global commodity prices has been cementing expectations of a rate cut by the RBI at the September policy review.

Rajan also cautioned that the economic growth is still below potential and inflation expectations are still high despite headline retail inflation having fallen sharply. Also, high stressed assets on the books of banks continue to crimp their ability to pass on policy rate cuts.

Meanwhile, as criticism about the misuse of the recently-formed joint lenders’ forum (JLF) mounts, Rajan said the RBI will shortly announce some measures that should improve the functioning of the forum. “We have discussed the experience with the JLF with banks and we will shortly announce some measures,” Rajan said.

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