The Indian economy, as well as the rupee, is in a far better shape to withstand shocks arising out a global meltdown in equity and currency markets than they were in 2013 when the Federal Reserve’s ‘taper tantrum’ sank the currency.
That was the word from Reserve Bank of India Governor Raghuram Rajan who was addressing a top bankers summit in Mumbai, around the same time the Indian stock market had opened down 3 percent and rupee tanked to 66.5 to the US dollar.
The ace central banker started his address mentioning the global turmoil, saying the Reserve Bank will not hesitate to use its USD 380-billion foreign-exchange reserves to jag out volatility that it has been assiduously building since Rajan took office.
“India is in a better position compared to other markets,” he said, stating the obvious — Indian growth is higher than most economies in the world and the currency has fared better than others.
For instance, while the rupee is now down a little over 6 percent versus the US dollar, other emerging market currencies, such as Brazilian real, Turkish lira, Thai baht, Malaysian ringgit and Indonesian are down between 8.5 percent and 25 percent.
India’s resilience has come about this time partly because of the fact that unlike in 2013, a commodity slump has made sure a falling currency will not too much pressure on its import bill.
But a key reason has been because Rajan has kept a hawklike focus on bringing down inflation — resisting calls from everyone finance minister down to slash interest rates.
Macro economic theory suggests that over the long term, currencies fall, in annual terms, about as much as the economy’s rate of inflation.
So unsurprisingly, Rajan kept the major part of his address sticking to his pet theme — even perhaps striking an odd figure as the devil of deflation is engulfing economies worldwide — that India has always been inflation-prone and battle against prices is still not fully won.
The most recent consumer price index (CPI) inflation in India fell to a record 3.78 percent, well below the RBI’s own 6 percent target for next year and 4 percent long term target.
But Rajan stressed upon the larger picture, and urged the market to look past temporary phenomena such as base effects and resist the urge to desire too many interest rate cuts too soon.
“The deflationary forces around the world and the commodity slump have given us a golden opportunity to bring inflation under control finally, and that too without having to resort to demand compression [using high interest rates],” he said.
He stayed away from giving any hint on whether he would follow up with another interest rate hike after the two he has already effected earlier this year.
But he patiently explained that instead of worrying about when the next rate cut will come by, the RBI under him was trying to build a long-term focused monetary policy framework that was working toward evolving the best combination of stable inflation, which would then lead to sustainable growth and a resilient currency.