Rajan sees probability of 25 bps increase in interest rate by Fed

Reserve Bank of India governor Raghuram Rajan on Friday primed the markets for a quarter of a percentage point rate hike by the US Fed next week – a move that is expected to cause ripples across the world, including India. “Our expectation is that the US Fed is nearly 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. “We hope that by March 2017, the entire process of restoring health will be complete”, Rajan said after the RBI’s central board meeting here today.

Addressing a press conference in Kolkata post board meeting of the Reserve Bank of India (RBI), the governor added RBI is prepared for any eventuality that may follow after Fed rate hike. He said there is a 70-75% possibility of a Fed rate hike.

Fed has prepared the ground and we are expecting that it will raise the rates anywhere between one and 25 basis points. The governor said RBI maintains a database shared among banks. Under the SDR mechanism, banks can take over defaulting companies, exchanging debt for equity, and for 18 months, the account will not be classified as NPAs.

Rajan, though, disputed this saying, “In many cases the banks have attempted to take action, there have been many impediments”.

“Now we are looking how those powers [given to bank by RBI] are implemented”.

“As and when we get the sense that more long-term liquidity is needed, appropriately we will perhaps issue open market purchase of securities”. “We have made adjustments and the final structure will not be a difficulty for them”. “It is an instrument which is very useful in right places and explosive in others”, he said.

“If required, we can go for OMO”, he added.

Rajan further said that the best defence against global volatility was the domestic macro stability.

He said that RBI’s intention was to supply the market with plenty of liquidity.