India better prepared for eventual Fed rate hike, says RBI chief

  • Reuters, New Delhi
  • Updated: Aug 31, 2014 16:20 IST

India is better prepared to handle the impact of interest rate increases in the United States as foreign funds are less likely to desert the country due to signs of an upturn in economic growth, its central bank chief said in an interview published on Sunday.

Reserve Bank of India Governor Raghuram Rajan's comments to the Times of India came on the heels of US jobs data which has heated up speculation over when the Federal Reserve is likely to raise interest rates.

Any decision by the Fed to raise rates, which have been held near zero since December 2008, will have implications for economies like India, as it could lead to capital outflows from emerging markets.

That could put pressure on emerging market currencies, particularly those with economies running high current account deficits, as India was last summer when talk of the Fed trimming its monetary stimulus led to a sharp depreciation in the rupee.

India has since taken action to correct its current account deficit and increase foreign exchange reserves.

"We certainly have done a great deal of preparation and are in a very different position from the summer of 2013," Rajan told the newspaper.

"My sense is that even when the Fed withdraws, people, after an initial bout of withdrawal, may consider India a good place to leave their money."

Rajan, a former chief economist at the International Monetary Fund, took over the reins at the RBI a year ago, when pressure on the rupee had become acute.

Having weathered that storm by taking by taking steps to boost currency reserves and narrow the current account gap, the rupee avoided a re-run of the crisis when the Fed actually began tapering last December.

Curbs on gold imports, such as higher duties, helped dramatically narrow India's current account deficit to $32.4 billion in the fiscal year that ended in March from $87.8 billion a year earlier.

India also built up its foreign exchange reserves, partly through measures that helped banks raise $34 billion in overseas loans and deposits from the Indian diaspora.

"We have plenty of reserves, but I see reserves as a second or third line of defence," Rajan said. "The primary line of defence is we should be attractive."

Gross domestic product data released on Friday showed India's lumbering economy grew at its fastest pace in more than two years in the quarter ending in June, and strengthening global demand should help boost exports.

Adding to the cheer, falling global crude prices have helped improve the health of public finances by drastically slashing the government's fuel subsidy bill.

The central banker, who predicted the global financial crisis in 2005, said his commitment to cool surging prices will also support the rupee when US rates finally do rise.

Rajan wants to reduce retail inflation to 6 percent by 2016 from near 8 percent at present, and left interest rates steady early this month, citing inflationary risks from the weak summer monsoon rains.

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