Rajan Says India Needs to Put House in Order Before Fed Tapering

Reserve Bank of India Governor Raghuram Rajan comments on the central bank’s interest-rate decisions and the postponement of tapering in U.S. Federal Reserve monetary stimulus. Rajan spoke to reporters in Mumbai today.

On the Fed’s decision:

“I do think, short term, it has in a sense postponed some of the concerns. My sense is that the markets were quite prepared for a moderate tapering. And, what this has done is, in a sense, it has again created the possibility of uncertainty down the line.

‘‘We need that stabilization regardless of what the Fed does. Because, if we are stabilized, we are better prepared for the tapering whenever it happens.

‘‘What we need to do is put our house in order before it comes back.

‘‘The postponement of tapering is only that, a postponement. We must use this time to create a bullet-proof national balance sheet and growth agenda, which creates confidence in citizens and investors alike.’’

On his RBI interest-rate decision:

‘‘We believe that easing the exceptional liquidity measures was warranted given that the external environment has improved and given that the government and the RBI have used the time since the measures were put in place to narrow the current-account deficit and to ease its financing.

‘‘The calibrated withdrawal will provide a boost to growth, reduce the financing distortions that are emerging in the market, and reduce the strain on corporate and bank balance sheets. We remain vigilant about external market conditions and will do what is necessary if they deteriorate once again.

‘‘We have also announced an intention to return to normal monetary operations where the repo rate will return to being the effective policy rate and liquidity conditions need not be as tight as they currently are.

‘‘Let me emphasize that the difference between the MSF and repo rate will be brought down to 100 basis points. At the same time, recognizing that inflationary pressures are mounting and determined to establish a nominal anchor, which will allow us to preserve the internal value of the rupee, we have raised the repo rate by 25 basis points.

‘‘On net, these measures will reduce the cost of bank financing substantially while allowing us to take an appropriately precautionary stance on inflation.’’

On inflation:

‘‘You always have to balance the state of the economy with your fight against inflation. What I would like to see is that we achieve, certainly, the RBI’s target of trying to bring WPI inflation below 5 percent.

‘‘We want to fight against inflation and we’ll bring inflation down.’’

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