China 'not falling off a cliff,' India's central bank governor Rajan says in Davos

DAVOS (BLOOMBERG) - China is still contributing to global growth as it adjusts its currency policy and shifts to consumer-led growth, according to India's central bank governor.

"My sense is there is underlying growth in China," Raghuram Rajan said in an interview with Bloomberg Television at the World Economic Forum in Davos, Switzerland. "It's not falling off a cliff." Questions remain about what China's growth implies for commodity markets and how it interplays with leverage, Mr Rajan said. Chinese authorities should be taken at their word when they say aren't deliberately depreciating the currency, he said.

A fresh sell-off in the yuan and Chinese equities this year sent shockwaves through commodities markets and helped wipe more than US$6 trillion off stocks worldwide on concern about the global economy.

"The Chinese move to a basket is understandable because the dollar is strengthening, but the yen and the euro are weakening, so clearly some of the actions that have been taken to weaken currencies do have effects elsewhere," Mr Rajan said. "One shouldn't see the Chinese move, to move towards a basket, as being unrelated to what's happened elsewhere."

The International Monetary Fund this week lowered its global expansion forecast to 3.4 per cent from 3.6 per cent in October. It warned the outlook could worsen if the emerging- market slowdown, China's shift to consumption-led growth, and the U.S. Federal Reserve's exit from ultra-low interest rates aren't managed.

India's rupee fell toward its record low this month as overseas investors sold more than a US$1 billion of Indian stocks. Mr Rajan, who has repeatedly cautioned against the "beggar-thy-neighbour" policy of competitive currency devaluation, has been using the country's foreign-exchange reserves to help slow the slump.

"We don't have a target in mind," Mr Rajan said. "What we do want to ensure is we don't get excess volatility."

Plunging global oil prices are helping offset inflation risks from a depreciating rupee. Even so, policy makers weigh many factors when deciding on borrowing costs, Mr Rajan said.

"The rate decision is based on something more complicated than the price of oil," Mr Rajan said. "It is an input. It goes in the direction of being more accomodative but there are whole lot of other things that we look at." Rajan's due to review policy on Feb. 2. He cut rates by 1.25 percentage point in 2015, and economists are predicting just one more reduction this year as inflation threatens to stay above his 5 percent goal for March 2017.