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Reserve Bank of India (RBI) Governor Raghuram Rajan on Wednesday cautioned that tapering of the US’ bond-buying programme by the Federal Reserve might have unexpected results, but added India was prepared for it. He said the central bank would bring measures to augment liquidity in the debt market in coming weeks.
“We are much better prepared to deal with any possible tapering, partly because we built some reserves... Current account deficit (CAD) numbers are far better, far healthier than in May. But we would not say we are complacent, as there could be unexpected effects of tapering,” Rajan told reporters on the sidelines of Delhi Economics Conclave, organised by the finance ministry.
The markets come under heavy pressure whenever there are talks of a tapering. In this context, the Federal Open Market Committee meeting on December 17-18 is going to be keenly watched.
RBI has raised $34 billion in the September-November period through concessional swap windows it offered to banks for foreign currency non-resident funds and overseas borrowing. Finance Minister P Chidambaram had recently said the mobilisation had far exceeded the government’s expectations.
In his address at the conclave, the Governor said RBI would roll out measures to improve liquidity and depth of the government securities (G-sec) market in coming weeks. He added the central bank would also strengthen the corporate bond market and improve liquidity in the derivatives market.
Amid economic uncertainty looming, with the Congress’ defeat in four of the five Assembly elections, Rajan said a stable central government after next year’s Lok Sabha elections could not be taken for granted and stressed the reform process should not be stalled.
“It implies all parties have to work together to ensure the government emerging after the general elections has the time to come to terms with the challenges in managing the Indian economy. Otherwise, markets and rating agencies may not be willing to cut the new government much slack. Any slowdown in putting large, stalled projects back on track before elections or any additional fiscal slippage will only amplify the large challenges the government will have to face,” he said.
Rajan added, under these circumstances, it would help if Parliament passed key Bills and if current authorities took action to improve growth and fiscal health, including raising diesel prices to the market level and eliminating other poorly targeted subsidies.
Rajan said the rupee had stabilised after falling to its all-time low of 68.80 a dollar at the end of August, and CAD was set to be contained at a level below three per cent of gross domestic product (GDP) this year.
CAD, which had touched a high of 4.8 per cent in 2012-013 and risen further to 4.9 per cent in the April-June quarter of this year, came down to 1.2 per cent of GDP in the July-September period, mainly as efforts to curb gold imports yielded results.
However, to questions on gold import curbs leading to smuggling, the RBI governor said a compression was necessary in the short term but not desirable in the medium term. He also said economic growth had started picking up and the rate of GDP growth was likely to be around five per cent this year.
Ahead of RBI’s review of its monetary policy on December 18, Rajan said he would focus on controlling inflation and rolling back the measures that had been taken to check the rupee’s volatility and improving liquidity.
“It (inflation) is proving very costly to our economy in terms of savings and investments. We need to bring inflation down. No single data or point or number will determine our next move, but our effort, firmly, is to control inflation,” he added.
Concerned over rising bad loans, the governor said RBI could consider making future borrowings more expensive for wilful defaulters. The central bank will next week bring a discussion paper on distressed borrowers and rising non-performing assets.
Amid economic uncertainty looming large after the defeat of Congress in Assembly polls in four states, Rajan said a stable government after general elections in April-May next year could not be taken for granted and cautioned that the process of reforms should not be stalled.
“It implies that all parties have to work together to ensure that any government that emerges post election has the time to come to terms with the challenges of managing the Indian economy. Otherwise, markets and rating agencies may not be willing to cut the new government much slack. Any slowdown in putting large, stalled projects back on track before elections or any additional fiscal slippage will only amplify the large challenges that the government will have to face,” he said.
Rajan added in these circumstances it would be beneficial if Parliament passed key bills and if current authorities took action to improve growth and fiscal health including raising diesel prices to market level and eliminating other poorly targeted subsidies.
Rajan's Recipe
Tapering
* Better prepared to deal with tapering but there could be unexpected effects
* RBI will roll out more measures in coming weeks to improve liquidity in G-Sec
Growth
* Glimmerings of stronger growth, but too early to say it has bottomed out
* Growth would be around 5%, fiscal deficit at 4.8% and CAD below 3%
Bad Loans
* Borrowing will become costlier for uncooperative and wilful defaulters
* RBI to come out with discussion paper on distressed borrowers next week
Monetary Policy
* Need to bring down inflation down as it is affecting savings and investments
* But no single data or point or number will determine the next move
Elections
* Formation of stable govt after general elections cannot be taken for granted
* Postponing necessary legislation will amplify challenges for new govt post-polls
