Seeking to guard investor returns from excessive exchange rate movements, RBI Governor Raghuram Rajan said on Thursday that a move towards an inflation target of 4 % would help contain currency market volatility.
“Our aim in the macro stabilisation is to make the exchange rate less and less an issue that investors have to worry about,” Rajan said.
Stating that the central bank has intervened in the past to minimise volatility, Rajan said, “If we move towards our inflation target of around 4 per cent, then the years of the past where you had extreme volatility in rupee because rupee inflation in India was much higher than the world, will become a thing of the past.”
Speaking here at an industry event, Rajan also stressed on the need to make the country’s banking system more vibrant and said steps are being taken in this regard. On overall economy, Rajan said India has almost everything for taking a big leap in production on manufacturing as well as services side.
“We have to take advantages of global linkages. We are on the verge of a revolution here. I do believe that we should allow our enterprises to find their way,” Rajan said, while pitching for creating “a business environment which will allow them to go where they desire to go”.
Speaking about the currency market volatility, Rajan said a long-term view would show that “depreciation in the rupee essentially matches inflation differentials and therefore anybody who invests at rupee rates gets appropriate returns to match the kind of depreciation risk that they have taken”.
“Put differently, if foreign investors want to lend to India in a long run for infra projects, the value of the rupee at the end of the project is probably a second order concern, should be a second order concern,” he added.
On supply side issues, Rajan said the government’s emphasis was on infrastructure creation and improving logistics network, “some of which is improving due to private sector companies like Flipkart and Snapdeal creating huge change in logistics”.
On power sector, he said: “Now for the first time we are close to self sufficient. Of course, if the distribution companies restructuring is done, perhaps full demand can be expressed but we are close.
“Given that today we are using about 60-65 per cent of the available capacity there is still room for more power production,” he added.