India will use forex reserves to limit rupee volatility, says central bank chief

Mr Raghuram Rajan says inflation, not "public pleading", will determine interest rate cuts.
Mr Raghuram Rajan says inflation, not "public pleading", will determine interest rate cuts.PHOTO: REUTERS

MUMBAI • India will use its foreign currency reserves to stem rupee volatility as stocks and currencies fall around the globe, central bank governor Raghuram Rajan said yesterday.

Mr Rajan also reiterated that any rate cuts would be undertaken in response to inflation and not to "public pleading".

"India is better placed compared to other countries with low current account deficit and fiscal deficit discipline, moderate inflation, low short-term foreign currency liabilities, very sizeable base of forex reserves," Mr Rajan told a conference in Mumbai. India has about US$380 billion (S$535 billion) in reserves.

"We will have no hesitation in using our reserves when appropriate to reduce volatility in the rupee," Mr Rajan said. "Once market volatility settles down, India should emerge once again as an investment destination of choice."

His comments came as Finance Minister Arun Jaitley steps up pressure on the Reserve Bank of India (RBI) to ease monetary policy.

More than US$5 trillion has been wiped off the value of stocks worldwide since China's yuan devaluation stoked concern that global growth is faltering just as the US Federal Reserve considers raising interest rates.

Mr Rajan's comments come as the benchmark BSE index tumbled as much as 4.2 percent to its lowest since October last year, while the rupee fell to as low as 66.52 to the dollar, its weakest since September 2013.

Analysts believe India's markets will remain relatively more insulated than other countries.

India has steadily built up its foreign exchange reserves to a record high since Mr Rajan took the helm of the RBI in September 2013, when the rupee was in the midst of its worst crisis in more than two decades.

But a slowdown in India's annual consumer price inflation to 3.78 per cent in July, its lowest level on record, has sparked calls for the RBI to cut rates further to help boost an economic growth rate widely seen as middling.

Yet after bringing down the repo rate by three-quarters of a percentage point to 7.25 per cent so far this year, the RBI kept its policy rate on hold at its most recent review earlier this month as it sought more clarity on inflation.

"Rate cuts should not be seen as goodies that the RBI gives out stingily after much public pleading," Mr Rajan said.

"Instead, what is important is sustained low inflation. And rate cuts are a natural consequence that the RBI has no hesitancy in delivering."

REUTERS

A version of this article appeared in the print edition of The Straits Times on August 25, 2015, with the headline 'India will use forex reserves to limit rupee volatility, says central bank chief'. Print Edition | Subscribe