As the rupee hit a new low and the stock market took a tumble, Reserve Bank of India (RBI) Governor Raghuram Rajan said on Monday that India has sufficient foreign exchange reserves to prevent volatility in the currency market.
India has foreign exchange reserves of around $380 billion and these would be used if needed to subdue the volatility in the currency market, he said on the sidelines of a banking conference here.
Speaking at the conference, Rajan referred to his earlier comments that the central bank was not a cheerleader for the economy and said it was not for the RBI to lift sentiments unduly to deliver booster shots to the stock markets.
"We do not have to look too far beyond our borders to see the consequences of such boosts. Rate cuts should not be seen as goodies that the RBI gives out stingily after much public pleading," Rajan said.
"Instead, what is important is sustained low inflation, something the prime minister emphasised in his Independence Day speech, and rate cuts are a natural consequence that the RBI has no hesitation in delivering," Rajan added.
He said there was much to be optimistic about the economy.
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"The Indian economy is full of possibilities, even as much of the world is mired in pessimism. Indeed, I have been arguing that the fragility of the world economy is precisely because it has focused on quick fixes rather than deep reform," Rajan said.
"The question for us as a society is whether we have the discipline to do what is necessary at a time when global conditions are propitious - commodity prices look like they will stay low for a time, helping the fight against inflation, and there is plenty of money around the world and at home, looking for investments, including in distressed assets, that can help us clean bank and corporate balance sheets," he said.
According to him, what sets poor nations apart from the rich was not people or resources or even luck but good governance, which comes from strong frameworks and strong institutions.
"A summary explanation of the economic problems of the recent past is that they arose because India outgrew its institutions. A summary of the government and the Reserve Bank's measures to restore sustainable growth is that we are building the necessary institutions," Rajan said.
Referring to the falling global trade, Rajan said the domestic demand has to be increased while avoiding the booms and busts that typically plague such efforts by emerging markets.
According to him, structural reforms will help strengthen the domestic demand growth and cited measures like Indradhanush of the central government for the banking sector, and licensing of payment banks by RBI.
Rajan said new small finance banks would be licensed next month and two new universal banks are launching next month.
According to the RBI governor, the economy has come a long way since the difficulties in 2012-13 though three areas are still "works-in-progress" from the RBI's perspective.
"First, economic growth is still below levels that the country is capable of. Second, while consumer price inflation has moderated, inflation expectations among the public are still high, creating a gap between the real rates that savers expect and the rates corporations think they pay. Third, stressed assets in the financial system continue to be high, which holds back growth and new lending, even while dampening bank incentives to cut base rates," the RBI governor said.
Rajan said the short term macroeconomic priorities of RBI are: help bringing down inflation and work with the government and banks to resolve the issue of distressed projects and cleaning up bank balance sheets.
On dealing with distressed assets, Rajan said the RBI had ended the forbearance accorded to restructured loans, which would now be classified as non-performing loans. However, RBI has made it easier to recognise and deal with distressed projects. In other words, while ending forbearance, we have introduced flexibility for those who recognise and deal with stressed assets," he said.
According to Rajan, companies in some sectors were in real distress and some could survive with government help while others were unviable, for which too much help to unviable firms could also cause distress to spread to healthy firms.
In this regard, the country needed rapid progress in the coming year on the creation of institutions necessary for resolution such as the new Bankruptcy Code and the Company Law Tribunals that would administer it as well as the Financial Resolution Authority (for resolving financial institution distress), the RBI governor said.