Hours ahead of US Federal Reserve’s monetary policy decision, RBI governor Raghuram Rajan met finance minister Arun Jaitley here on Wednesday and said that India is fully prepared to deal with situation arising out of the Fed’s moves on rates.
While the RBI governor did not rule out the possibility of near-term volatility in the markets, he said that in the medium term, markets will be back to normal.
“There will be some volatility in the market,” Rajan said to newspersons after emerging from the meeting with Jaitley, in comments quoted by newsagency NewsRise. Adding that “normalcy will return soon,” Rajan said that the country has significant forex reserves and current account deficit is under control.
As on March 6, the country’s forex reserves stood at $312.32 billion while the total reserves stood at $337.79 billion, according to Reserve Bank of India (RBI) data. Further, the current account deficit (CAD) is estimated to be 1.3 per cent of GDP in 2014-15, significantly lower than earlier projections on back of net capital inflows, mainly in the form of buoyant portfolio flows along with the support of FDI inflows and external commercial borrowings.
Market participants welcomed a reassurance coming from the RBI Governor. “Reassurance coming from the Governor is good. There is a consensus in the market that ‘patient’ word will find no place in the FOMC (Federal Open Market Committee) statement. While the markets may see some correction, the market is not too much concerned about the rate hike in US but on domestic earnings growth and the next phase of growth in market will follow the earnings growth,” said Nandkumar Surti, MD and CEO, JP Morgan AMC.
On Tuesday, in a speech at the RBI, Christine Lagarde, managing director, International Monetary Fund, had said that she feared the “taper tantrum” of 2013 was not a one-off event. She argued that the timing of interest-rate liftoff and the pace of subsequent rate increases “can still surprise markets”. Rajan has repeatedly warned about the impact central bank actions in major economies can have on the developing world.