Even as the country’s foreign exchange reserves are at a 39-month low, Reserve Bank of India (RBI) Governor Raghuram Rajan says they are at a “comfortable level”.
According to RBI data released last Friday, the country’s foreign exchange reserves were at $275.3 billion as on September 13, which went up by about half a billion over the previous week.
The central bank has been cautious in using its forex to stem the depreciation of the rupee, which has weakened by 14.4 per cent against the dollar this financial year. Under Rajan, who took charge on September 4, the currency has been able to halt its fall, which has appreciated 5.5 per cent this month.
In July, the central bank had beefed up its foreign exchange market intervention as it sold close to $6 billion to stem the rupee fall. Rajan has also announced several steps, like swap facility for banks for foreign currency non-resident bank, or FCNR (B), deposits and banks’ overseas borrowing limit. Both these windows, which are available till November 30, are expected to swell the forex kitty by $10 billion.
According to a Bank of America Merrill Lynch report, India’s import cover has halved to seven months — last seen in 1998 — in the past five years, which is well below the eight to 10 months needed for rupee stability.
Rajan, who was speaking at a seminar in Frankfurt, reiterated the policy stance of the central bank was “neutral” at this point in time, though he said high and persistent retail price inflation was a concern. “At this point, we are neutral, we will see how things develop,” he said when asked about the central bank’s policy stance.
The RBI chief added inflation was not just due to higher food prices. “Unfortunately, there is still some inflation when you strip out the effects of food and energy. Therefore, it is not just food, it’s other factors also, which are driving inflation,” Rajan told reporters on the sidelines of the conference.
During the mid-quarter policy review, Rajan had hiked the repo rate by 25 basis points (bps) to 7.5 per cent, while reducing the marginal standing facility rate by 75 bps to 9.5 per cent.
“The intent here is that when the repo rate becomes the effective policy rate, it should be consistent with inflationary conditions in the economy. On net, these measures will reduce the cost of bank financing substantially while allowing us to take an appropriately precautionary stance on inflation,” Rajan said while announcing the policy last Friday.
He added there was a need to bring real interest rates down as low as possible. According to him, there is a need for new innovative ways to bring down real interest rates. Rajan believes emerging market economies must resort to fiscal tightening when money is flowing in.
The US Federal Reserve has recently decided against reducing its massive monetary stimulus, known as the third round of quantitative easing. According to Rajan, an exit from quantitative easing will be more abrupt than entry. He said there was a need to rethink dangers of over-stimulation. Besides, there is a need to rethink dangers of cross-border capital flows. Going forward, the external consequences are large, he added.