April 11 (Bloomberg) -- India is prepared for potential financial fallout if the Federal Reserve increases interest rates before April 2015, Reserve Bank of India Governor Raghuram Rajan said yesterday in Washington.
“Nobody is prepared for every eventuality, but for most eventualities, we are prepared,” Rajan said in an interview with Bloomberg News after an event in Washington. “For us, the specific timing matters less than that it should happen when U.S. growth is strong.”
The Fed is “mostly” right in how it is managing monetary policy, Rajan said during a panel discussion at George Washington University, adding the central bank needs to improve communications because measures it’s taking now will affect what emerging markets do in the future. Still, he said he doesn’t expect a U.S. rate increase by April 2015.
Rajan’s call for better global policy coordination underscores the challenges faced by emerging markets, which suffered an investment rout last year amid speculation the Fed would soon begin paring stimulus. India has built up foreign-currency reserves and is seeing capital inflows, the RBI chief said, yet even improving emerging economies are exposed to spillovers from Fed policy moves.
“The single biggest factor in the stabilization of the external markets was the current-account deficit came down significantly,” Rajan said separately at the Brookings Institution. The deficit in the quarter ended March was probably about zero, he said.
Factory Output Data
India’s factory output unexpectedly contracted 1.9 percent in February, the most in nine months, the government reported today. That followed interest rate increases of 75 basis points since Rajan took over the central bank in September. Manufacturing output fell 3.7 percent from a year earlier while consumer goods output shrank 4.5 percent, the Central Statistics Office said in a statement.
A separate report today showed exports fell 3.2 percent in March from a year earlier as the trade deficit widened to five-month high of $10.5 billion. Overseas shipments fell for the second straight month after rising for most of last year and making up for the slowdown in domestic demand.
Foreign investors are boosting purchases of Indian assets on optimism general election concluding May 16 will lead to a government that can spur an economic recovery. Fitch Ratings said today it maintained a stable outlook and expected no developments that would prompt a change to India’s rating of BBB-, the lowest investment grade.
“Once the next coalition starts implementing its economic policies, it will become clearer whether the economy can return to a higher sustainable growth path, or whether it remains stuck at current levels,” the ratings company said in a statement today.
The rupee has appreciated 15 percent against the dollar since reaching a record low on Aug. 28, the best performance among the 31 so-called expanded major currencies tracked by Bloomberg. India has curbed fiscal and current-account deficits and reduced inflation after Rajan raised interest rates.
Rajan, in Washington to attend the spring meetings of the International Monetary Fund and the World Bank, also said the IMF needs to play a larger role in promoting global stability and offering liquidity to emerging markets, which often face “substantial stigma” when they approach the lender.
Central banks should assess the global spillover from their actions, going beyond the immediate feedback to the medium term effect as other economies alter their own policies, according to the text of Rajan’s speech yesterday at the Brookings Institution. Emerging economies must also work to become less vulnerable, and stronger international safety nets are needed, he said.
If emerging markets are again pushed to a sustained bout of exchange-rate intervention and reserve accumulation, that will be detrimental to global demand, said Rajan, a former chief economist of the IMF.