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Rajan plays down Fed taper impact

Rajan: Well-prepared

Mumbai, Jan. 29: Reserve Bank of India (RBI) governor Raghuram Rajan today said India was much better prepared to deal with the effects of any possible outflows resulting from the tapering of the US monetary stimulus.

Rajan’s comments came just ahead of a widely expected announcement by the US Federal Reserve of another $10-billion cut in its purchases of treasuries and mortgage-backed securities to $65 billion a month.

Last year, the rupee was badly roiled after the US central bank indicated that it would start tapering its bond purchases. The ensuing liquidity from the purchases had benefited emerging markets such as India.

“We are much better prepared for any outflows this time and, to the extent that if it happens, I am not too worried. I think we have to continue focusing on getting our domestic house in order. I think that itself will create conditions for the financing of the current account deficit,” Rajan said in his post-policy teleconference with analysts and researchers.

Rajan indicated at the conference that the central bank’s focus on taming inflation would continue. However, this did not mean that the RBI had formally embraced the principle of inflation targeting that has been strongly advocated in the Urjit Patel committee’s recent report that outlined the framework for the conduct of monetary policy. But he said the RBI was committed to bringing down inflation.

Seeking support from the political class in its fight against inflation, which may result in higher interest rates, Rajan said, “Ultimately, inflation is both a monetary and a political issue and we need the political establishment to understand the importance and I am confident that it will.”

He added that the public was also on board as it largely knows the purpose of the RBI.

The central bank was trying to take the public along in its fight against inflation, Rajan said while expressing confidence that the central bank was succeeding in this effort. Investor confidence will rise once inflation is brought under control, he added.

While the RBI governor parried queries on whether he would closely watch the headline consumer price inflation (CPI) or the core-CPI (non-food) number, he said though there has been some reduction in core inflation, the pace of reduction was not enough and this had forced the central bank to raise the repo rate by 25 basis points.

“Of course, there has been some reduction (in core inflation) but we would have liked to see a stronger reduction there. Given that, we thought that a certain rate increase would be appropriate,” he said.

The RBI governor said the apex bank had been focussing on core CPI to demonstrate there were other aspects apart from food inflation that were worrisome. These include the price of services, education, healthcare and housing, which have steadily risen over the past few years.

 
 
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