Mumbai: India has sufficient foreign exchange reserves to prevent any undue volatility in currency markets, Reserve Bank of India (RBI) governor Raghuram Rajan said on Monday.

“India has $355 billion of reserves and another $25 billion because our forward dollar sales are not due for the next one year; so, we have $380 billion to play with if needed," Rajan said on the sidelines of a banking conference in Mumbai.

“...we try to prevent undue volatility. If we see undue volatility, we have the resources to deal with it," he added.

Mirroring a fall across global risk assets, the Indian rupee fell sharply in trading on Monday. The rupee closed 1.23% down at 66.65 per dollar, a level last seen on 4 September 2013.

The 30-share S&P BSE Sensex closed down 1,624.51 points, or 5.94%, at 25,741.56 points, the lowest since 11 August 2014. The National Stock Exchange’s (NSE) 50-share Nifty closed down 490.95 points, or 5.92%, at 7,809, its lowest close since 17 October 2014.

Earlier in the day, the Sensex had fallen as much as 1,741.35 points, or 6.36%, to 25,624.72, while the Nifty tumbled 530.55 points, or 6.39%, to 7,769.4.

More than $5 trillion has been wiped from the value of global stocks since China’s shock devaluation of the yuan two weeks ago. The Shanghai Composite Index slid 8.5% as concern mounted that China’s economic slump is deepening and government measures to stop it will fail, Bloomberg reported.

China’s move is the latest step in a competitive devaluation of currencies that started with unconventional monetary policies around the world, said Rajan, noting that the steep appreciation in Asian currencies vis-à-vis the euro and the yen over the past 18 months is now starting to correct.

“This time, the markets are adjusting to the Chinese move. In India, we have to absorb this volatility. The fundamentals of our economy are good. After this volatility is over, the markets will reassess the fundamentals and then they will realize that India is a good place to be," Rajan said.

Commenting on the clamour for more and steeper rate cuts from RBI, Rajan said the central bank cannot act as a “cheerleader".

“Rate cuts should not be seen as goodies that the RBI gives out stingily after much public pleading. Instead, what is important is sustained low inflation, something the Prime Minister emphasized in his Independence Day speech, and rate cuts are a natural consequence that the RBI has no hesitancy in delivering," said Rajan, adding that it is not the role of the central bank to elevate sentiment unduly.

In his speech at the banking conference, Rajan said a 1 percentage point rate cut may mean in the short term that demand will pick up, bolstering economic growth, and a sharp rise in the stock market, but that’s unlikely to be sustained if the economy is supply-constrained.

“...it is not the role of the central bank to elevate sentiments unduly, to deliver booster shots to the stock market so that it can soar for a while, only to collapse when reality hits. We do not have to look too far beyond our borders to see the consequences of such boosterism," Rajan said.

The central bank has so far cut rates by 75 basis points since the start of this year. A basis point is one-hundredth of a percentage point.

A steeper-than-expected fall in consumer inflation in July to 3.78% has led to calls for another rate cut from RBI. Most economists now expect RBI to cut rates at its policy review in September.

“Despite the risks the governor mentioned, I think a rate cut in September is a given because we are well on the way to be 60 to 80 basis points below the 6% (consumer price inflation) RBI target in January," said Saugata Bhattacharya, chief economist, Axis Bank Ltd.

“However, after that, the governor has a challenge to achieve his 4% inflation target in 2017 because both demand pressures as well as the stress on government’s finances will increase by then," Bhattacharya said.

Rajan stuck to the line taken by the central bank in its last monetary policy statement on the possibility of any further rate cuts.

“Significant uncertainty will be resolved in the coming months, including the likely persistence of recent inflationary pressures, the full monsoon outturn, as well as possible (US) Federal Reserve actions. As the Reserve Bank awaits greater transmission of its front-loaded past actions, it will monitor developments for emerging room for more accommodation," said Rajan, adding that inflation expectations among the public are still high.

RBI’s short-term macroeconomic priorities are clear and include helping growth by bringing down inflation while working with the government and the banks on speeding up resolution of stressed assets, said the governor.

According to the new monetary policy framework agreed between the government and RBI, the central bank is to bring down the consumer price-based inflation to 6% by 2016 and thereafter 4% in 2017.

“The strong disinflation, even deflation, in the world in the last few years gives us a golden opportunity to change," he said, adding falling commodity prices and “astute" food management by the government has ensured that part of the job has already been done, without having to undergo extreme demand compression. But inflation expectations among the general public remained high.

The latest inflation expectation survey of RBI showed Indian households expect inflation to top 10% in the coming year. This is way higher than what the actual inflation will likely be, considering the lower than expected July inflation numbers.

Stressed assets

The RBI governor said banks’ reluctance to label stressed assets as “non-performing" and the delay by the debt recovery tribunal system have emboldened uncooperative promoters and kept them from accepting their share of the losses.

Total stressed advances at scheduled commercial banks in India increased to 11.1% of total advances in March from 10.7% in September, RBI’s financial stability report released on 26 June said. Stressed assets include gross non-performing assets (NPAs) and loans that have been restructured by banks.

Gross NPAs of banks increased to 4.6% of total advances in March from 4.5% in September, the report said, adding that stress on bank books will persist in the first half of this year.

“Regulatory forbearance, where RBI makes it easy for banks to ‘extend and pretend’, is not a solution," he said, adding that no other stakeholder—such as the promoter, tariff authorities, tax authorities, etc.—contributes to resolution, and the real project limps along becoming increasingly unviable.

Rajan charged some large promoters for taking advantage of banker fears about assets turning non-performing to extract unwarranted concessions, without any sacrifice in the value of their stake. Regulatory forbearance, therefore, ensures that problems grow until the size of the provisioning required to deal with the problem properly becomes alarmingly large—which then prompts calls for yet more forbearance.

Forbearance is also deferring a small problem and get hit by a large problem down the road when things cannot be pushed into the future any more. He cited the plight of the power distribution companies where states in 2012 agreed on a financial restructuring plan, convincing RBI to allow restructuring of those loans.

“Unfortunately, three years later, states have not undertaken many of the actions promised under the FRP, perhaps because the urgency to act was not there so long as banks continued financing losses. Meanwhile, debt has built up further, and the cost of power, including line losses and interest costs, is mounting inordinately."

The central bank will soon announce some measures to boost the joint lenders’ forum mechanism of banks. In this forum, stressed assets are identified early and resolution, including selling off the assets to recover dues, is taken.

“Too much help to unviable firms can also cause distress to spread to healthy firms. In this regard, the country needs rapid progress in the coming year on the creation of the institutions necessary for resolution such as the new Bankruptcy Code and the Company Law Tribunals that will administer it as well as the Financial Resolution Authority (for resolving financial institution distress)," Rajan said.

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