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Ahead of a decision by the US Federal Reserve on interest rates, Reserve Bank of India (RBI) Governor Raghuram Rajan on Wednesday said India was prepared to deal with any volatility in the market. He added RBI would take cues from a statement by the Fed.
“There could be volatility in (stock and currency) markets if the Fed moves on rate...(but) normalcy will be restored in the market even if there is volatility,” he said after meeting Finance Minister Arun Jaitley in Parliament House here.
The meeting comes days ahead of the finance minister’s post-Budget interaction with the RBI board, scheduled for Sunday. The interaction is significant in the wake of the Finance Bill, 2015, proposing dilution of RBI’s powers in the money market.
The Federal Reserve on Wednesday opened the door further for an interest rate hike as early as June, ending its pledge to be “patient” in normalising monetary policy. But the US central bank signalled a more cautious outlook for US economic growth and slashed its projected interest rate path, in a sign that it remained concerned about the health of the recovery. Any rate increase by the Fed might have made it difficult for RBI to cut the repo rate.
It was widely expected the Fed would give a signal on a rate increase, as the US economy was showing signs of improvement. This might result in flight of capital from emerging markets, including India. The US economy added 295,000 jobs in February and the unemployment rate in that country fell to 5.5 per cent, the lowest in the post-recession period.
On Tuesday, International Monetary Fund chief Christine Lagarde had cautioned India and other emerging market economies against market volatility due to a possible interest rate increase by the Fed. “Perhaps, we are approaching a point where, for the first time since 2006, the US will raise short-term interest rates later this year,” she had said.
After rising for two consecutive weeks, India’s foreign exchange reserves declined by $286.3 million to $337.793 billion in the week ended March 6, despite a rise in foreign currency assets. Rajan said India’s current account deficit was under control. The deficit narrowed to 1.6 per cent of gross domestic product in the December quarter from two per cent in the previous quarter.
RBI is to hold its first bi-monthly monetary policy review for 2015-16 on April 7. It is expected the central bank will take a decision on a rate cut, in the light of conflicting signals from Consumer Price Index (CPI)-based and Wholesale Price Index (WPI)-based inflation. While CPI inflation rose to 5.37 per cent in February from 5.19 per cent in January, the WPI showed 2.06 per cent deflation in February, against 0.39 per cent deflation in January.
On March 4, RBI had cut the repo rate by 0.25 percentage points. The cut — from 7.75 per cent to 7.5 per cent — came within days of Finance Minister Arun Jaitley announcing in the Union Budget that the government was committed to fiscal consolidation.
