Rajan Signals Better India Outlook as Exports Extend Climb
Reserve Bank of India Governor Raghuram Rajan signaled he expects an improvement in the nation’s economic performance as exports and major investment projects revive, provided risks from the U.S. diminish.
“We have two or three positives,” Rajan said yesterday in a Mint newspaper interview aired on Bloomberg TV India. “One is stronger agricultural production. Second, the projects that have slowed or stalled coming on stream. Third is exports.”
The U.S. budget impasse that led to a partial government shutdown there poses a threat to the outlook, according to the 50 year-old former International Monetary Fund chief economist. Damping inflation is the key concern, he said, while adding he’ll take into account economic conditions after growth slowed. Data today showed exports (INMTEXUY) rose a third month in September.
Rajan, governor since last month, on Oct. 7 further eased emergency liquidity curbs imposed on the banking system in July to support the rupee as his efforts to attract dollar inflows boost the currency. He began the relaxation in his first policy review on Sept. 20, when he also raised the benchmark repurchase rate to tackle consumer-price inflation of more than 9 percent.
The rupee erased losses, trading at 61.785 a dollar as of 2:54 p.m. in Mumbai after earlier declining as much as 0.8 percent. The S&P BSE Sensex index of stocks rose 1.3 percent. The yield on the 10-year government bond maturing in May 2023 slid to 8.46 percent from 8.50 percent yesterday.
The currency has climbed about 11 percent since reaching a record low on Aug. 28, paring its drop over the past year to 15 percent, after Rajan offered concessional swaps for banks’ foreign-currency deposits and borrowings to encourage them to raise dollars.
“Markets have stabilized somewhat and remained stable even after the monetary-policy announcement, which gave us the confidence to do a little more” on Oct. 7, Rajan said.
The swaps windows have attracted $5.6 billion so far, Rajan said Oct. 4. The steps will boost RBI reserves by $10 billion, helping to recoup the currency holdings needed for rupee stability, according to Bank of America Merrill Lynch.
The Reserve Bank in August began selling dollars to the biggest state-run importers of crude oil to take demand for foreign exchange off the spot market.
“We have to reintroduce the oil demand back into the market,” Rajan said, adding that will be the “true” test of the currency’s stability.
Exports have climbed since July, snapping a three-month stretch of declines as the weaker rupee helped competitiveness.
Overseas shipments rose 11 percent in September, imports dropped 18 percent and the trade deficit shrank to $6.76 billion, the narrowest shortfall since March 2011, according to today’s release and previously reported data.
The RBI cut the marginal standing facility rate to 9 percent from 9.5 percent on Oct. 7, easing liquidity with the second reduction in that borrowing cost in less than a month.
Rajan has previously said he plans a measured roll back of the cash squeeze imposed by his predecessor Duvvuri Subbarao.
The new governor raised the repurchase rate to 7.5 percent on Sept. 20 from 7.25 percent, pledging to cool price pressures. More policy tightening may be needed, the IMF said yesterday.
The best way to bolster the rupee “is to reassure people about inflation in the medium term,” Rajan said.
Prime Minister Manmohan Singh’s second term in office has been marred by graft scandals, the risk of a credit-rating downgrade and slowing economic expansion.
His government, facing a general election by May next year, began policy changes last September to spur investment.
The steps included setting up a panel to speed up stalled infrastructure projects. Projects worth 3.84 trillion rupees ($62 billion) have been cleared by the panel up to Aug. 27, according to the government.
The economy will expand 5 percent to 5.5 percent in the 12 months ending March 2014, the Finance Ministry estimates. HSBC Holdings Plc predicts slower growth of 4 percent, which would be the weakest pace in more than a decade.
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