‘RBI has built up defences against volatile capital flows’
Reserve Bank of India Governor Raghuram Rajan on Friday said the country has layers of defence against volatility arising out of capital outflows, as themacroeconomic conditions have improved.
The key economic parameters such as fiscal deficit, current account deficit and foreign exchange reserves have improved since 2013, when the country was in the middle of a currency crisis, with the rupee hitting a historic low against the dollar.
“India has three layers of defence against volatility. The first layer of defence against volatile capital is our good macroeconomic environment, which we turned from the situationitwasin2012. Now, Ithink we are in a much better situation. With low current account deficits, low fiscal deficits, low inflation, we have established that,” Rajan, who took charge of the central bank in September 2013, said here. After taking charge, Rajan had unleashed a seriesofmeasureswhichhelped the rupee to cut its losses and stabilise. “The second defence is the reserves. Today, our reserves are $350-billion plus, which has accumulated since the days of September 2013. The third layer of protection is from growth. Already, we are the fastest growing large economy in the world,” he said.
According to latest RBI data, foreign exchange reserves were atanall-timehighof$353.88billion for the week ended May 15. The reserves fell to $274 billion in August 2013, when the rupee hititsnadir. However, Rajanalso said building foreign exchange reserves “beyond a point” was equivalent to intervention.
“Some exchange rate intervention for precautionary purposes is necessary. You need to build reserves if you are an emerging market but beyond a certain point, it probably is direct intervention,” he said.
Rajan also said the World Bank and Asian Development Bank (ADB) should be ready to bring in long-term risk capital for infrastructure projects in emerging markets.