A day after keeping policy interest rates unchanged in the monetary policy, Reserve Bank of India Governor Raghuram Rajan on Wednesday said the central bank is not biased towards either raising or cutting interest rates, and its monetary policy stance will depend only on inflation data.
He also indicated that the cap on foreign portfolio investors (FPIs) in the government debt is likely to be increased in a “steady” and “measured” manner.
“As data comes in we will have a better view of what is happening and adjust accordingly, so I shouldn’t assume that we’re either biased towards raising rates or cutting rates at this point,” Rajan said while addressing analysts in a conference call.
However, RBI Deputy Governor Urjit Patel, who heads the monetary policy department, said, “If the 2016 January inflation objective is under threat in any serious manner then we would look to tighten. The flip-side is that if inflation comes down earlier than that on a durable basis, then we would look to be more accommodative.”
He, however, said that a likely hike in interest rates by the US Federal Reserve will not have any impact on RBI’s stance, asserting that it will be driven only by domestic situation. “Our policy will be determined solely by reading our inflation data points and projections thereof.”
On hiking the cap on foreign investment in government debt, Rajan said, “We want a steady increase in limits, a measured increase so that we understand what is happening and we see the market develop as these limits are increased. We do think FPIs are extremely important to market development.”
While foreign investors have exhausted over 96 per cent of the $25 billion investment limit in government debt, Rajan hinted that there is no need to increase the limit immediately. In July, the RBI increased the investment caps for foreign investors in government securities by $5 billion to $25 billion, within the total limit of $30 billion.
“As short-term debt rolls over, that frees up more space in government bonds and so it’s not as if that space is completely shut out and over time we will re-examine and see what we can do,” he said.
Rajan added the RBI is talking to Euroclear and other organisations to allow trading in Indian government bonds to be settled through their systems.
The RBI also said that the country is not in talks with global bond indices for an inclusion in the emerging markets category, even though there are obvious advantages like attracting more funds.
“The main issue which the index people are asking is to totally remove the ceiling on FPI investment in government bonds. Because of our capital account management issue, we are not in a position to do that but in a progressive manner we will increase,” RBI Deputy Governor HR Khan explained.
On the corporates’ overseas borrowings, Rajan said that there was a need for companies to look at hedging from the financial perspective and hedges should not placed like bets assuming a single direction for the currency to move in. The RBI kept its key policy repo rate unchanged at 8 per cent on Tuesday and said it will refrain from cutting interest rates until it is confident that consumer inflation can be reduced to a target of 6 per cent by January 2016.