Markets will settle down, investors always come back: Rajan

Reserve Bank of India Governor Raghuram Rajan on Wednesday sought to allay fears amid the stock market plunge and the rupee nearing its lowest-ever level, saying things will stabilise and people will look at stable emerging markets, including India.

Rajan said the rupee has been “relatively strong” in the emerging market currency basket, but India is affected by the “same kind of jitters” impacting world markets.

“My sense is that at this point if you are an emerging market, you focus on fundamentals, try and get inflation down, try and get your current account deficit down, keep your fiscal on target, do all the good things, and then people reward you,” he said at Davos.

Investors “take the money off the table in a hurry when they are doing it everywhere, but then they come back”.

“My sense is that after the initial volatility, things will stabilise, people will try and look for the good, stable emerging markets. India is one of them. Our growth is pretty good, all the other indicators seem to be going well,” he told CNBC.

While the rupee on Wednesday hit 68.16 per dollar level, the lowest since September 2013, the stocks saw a deep plunge, tanking around 650 points to crash below the 24,000-level on global growth worries and a sharp slide in oil prices before regaining some lost ground to settle 418 points lower.

On the central bank’s monetary policy stance next month, he said the rest of the world is facing a deflationary environment and “that will help India disinflate”.

“It’s helped us quite a bit so far, you’re right, the lower price of oil will help,” he said.

Rajan is confident that India is on target to meet January inflation target of below 6 per cent.

“Going forward, we have to disinflate a little more. So, at the meeting (on February 2), we will take all these factors into account and decide what the next step is, but broadly I would say we are on the right path,” the central banker said.

Asked if there was room to manoeuvre, he said global investors want to be convinced that India will stay the course will disinflate because they prefer lower inflation.

“So, we need to, at points of volatility, reassure them that this is indeed what we intend to do.”

“At the same time, you are right that the disinflationary environment around the world does create room, so we have to play these things against each other.”

r Rajan said that in a jittery state, “everybody is looking at everybody else and saying ‘is this the point where they take the money off the table’ because markets have moved up quite a bit”.

“Part of it is wondering what is really happening in China, why did the Renminbi start moving a little, and is there more to come? And of course the oil price, how far will it go and does it affect some entity, some lever entity somewhere, which has oil exposure, and does that create problems? So I think some jitters are really jitters about jitters, and some is really wondering about fundamentals,” he said.

Asked if the fundamentals justify the decline in markets worldwide, he said, “Broadly, no.”

“Of course, it’s hard to tell what the right levels for asset prices are, but is there something that changed dramatically over the last few weeks that would say the world economy is heading downwards? I don’t think so. In fact, there is a fair amount of sense that, yes, we’re trudging along more slowly than we should, but it’s not the abyss that we’re looking at,” he said.

Asked if there was a room to lower rates over a quicker timeframe, he said, “I think going forward, if these forces persist, obviously it will give us more room.”

“I think if we persist in this, and I have no doubt that we will, this will amount to something much bigger. My sense is we are something like we were in 2001-02, when we did a lot of work but didn’t show up in the growth numbers.”

“We were laying the stage, and after that we had ten years of very strong growth. So my hope and my expectation is that, (and) that is what we are doing now. A lot of little, little reforms that combine together to make a big reform,” he said.

First Published: Jan 21, 2016 09:49 IST