RBI can use FX reserves to curb volatility – Rajan

Mumbai: In its biggest intra-day crash this year, stock market benchmark Sensex plunged by 1,006 points while Nifty fell below 8,000 level in early trade today due to heavy selling by funds amid global sell-off as worries about China’s economy deepen.

Mundra’s statement means that RBI is seriously pondering over ways to monitor the world of cryptocurrency although, as Rajan mentioned last week, it is only carefully watching it and does not wish to interfere at this stage because in India this market is very small.

Central bank Governor Raghuram Rajan responded to the rout saying he would resist calls to give “booster shots” to markets and India will emerge as an “investment destination of choice” once volatility subsides. The Sensex, a Mumbai exchange that is the pulse of India’s domestic stock market, lost over 1,700 points at one point in trading on 24 August. “A summary of the Government and the Reserve Bank’s measures to restore sustainable growth is that we are building the necessary institutions”, Rajan said.

Rajan told the gathering that they were eyeing the interest rates situation closely.

“We are an interconnected market and there would be occasions when these kinds of things will happen, but I think the solution is the right mix of the medium and long term policies”, he added.

RBI chief Rajan said that the best way for a central bank to ensure sustainable growth is to keep demand close to supply so that inflation remains moderate. India’s finance minister Arun Jaitley has, in recent weeks, reiterated that conditions are right for rates to come down.

Rajan also issued a warning against overburdening central banks to fix struggling economies. By this, I did not mean that the RBI does not want to do its utmost to see the economy do well.

“We do not have to look too far beyond our borders to see the consequences of such boosterism”. However, Rajan ended up siding with the minority, keeping the policy rate on hold at 7.25 per cent while leaving the door open to ease further depending on the inflation outlook and how swiftly banks lower their lending rates.

The comments, in an interview with The Economic Times, reiterate Rajan’s frequent criticisms of the competitive devaluations he has said are occurring globally because of actions taken in the euro-zone, Japan, and most recently China.

According to him, what sets poor nations apart from the rich was not people or resources or even luck but good governance, which comes from strong frameworks and strong institutions.