Reserve Bank of India (RBI) Governor Raghuram Rajan said on Friday India’s central bank was ‘prepared’ for any change in global financial flows and market volatility which may arise due to the US Federal Reserve raising interest rates by up to 25 basis points next week. “We don’t have any independent estimate, but looking at the market our sense is there is a 70-75 per cent probability of the US Fed raising rates. I think the Fed has prepared us carefully. So, it is likely that at this point they will go ahead, at least that is our betting,” Rajan said after RBI’s board meet.
“…my guess is not more than 25 basis points, but it could be anywhere between zero and 25, probably between 1 and 25,” he replied when asked at what could be the possible hike in US interest rates.
The governor said RBI is prepared for “any eventuality” arising out of the Fed’s decision during its December 15-16 policy meeting, although “one cannot be completely confident that what could happen”. In the board meet the central bank discussed global and domestic economic issues and domestic economic concerns.
Talking about global and domestic economic concerns, deputy governor Urjit R Patel said like other emerging markets some changes in the financial flows was expected in the world following the Fed’s decision. “Our expectation is that the US Fed is almost certain to increase interest rates next week, and what would be important is to analyse the language that is used by the Fed while making this important monetary policy change,” Patel said. Commenting on market volatility that may occur after Fed rate hike, Rajan said the best defense against global volatility was “sound domestic policies”.
“Our intent is not to cut all volatility. Some volatility will emerge due to some market forces…some of the volatility that we see because of the market anticipation…I think going forward the best defense against global volatility is sound domestic policies. So, in another words don’t worry so much about what is happening outside, but make sure that what you are doing inside is sensible and create the atmosphere of small and sustainable growth,” he pointed out.
The governor said RBI’s policy was to supply markets with “plentiful” liquidity and it would “perhaps” carry out more open market purchases of bonds when more long-term liquidity was needed.
“As and when we get the sense that more long-term liquidity is needed, appropriately we will perhaps issue open market purchase of securities. All instruments are available to us and we will continue to keep the market plentifully supplied with the appropriate amount of liquidity,” he averred.
The RBI said it is looking at how the banks are using the “various new powers” given to them in order to accelerate the process of recovery of bad assets, and that the central bank is having “ongoing dialogues” with the lenders in this regard.
With inputs from Financial Express