Rajan Sees India Better Prepared for Fed Tightening

India is well prepared to weather the renewed bout of market volatility that may await emerging markets when the U.S. Federal Reserve starts raising interest rates, Reserve Bank of India Governor Raghuram Rajan said.

“My hope is that after the initial volatility, there will be differentiation and the financial investors will try to see where there is some macro stability,” Rajan said at an event in Washington yesterday. “I am not therefore overly worried about that process.”

Most Fed officials expect to start raising interest rates next year, according to projections the policy making Federal Open Market Committee released on Sept. 17.

When the Fed signaled last year that it would begin paring its record monetary stimulus, which includes asset purchasing, overseas investors pulled $8 billion from rupee-denominated debt in a move that pushed the currency to an all-time low.

“We’ve got plenty of reserves relative to where we were last year,” Rajan said at an event organized by the Institute of International Finance. “We’ve got inflation coming down in a substantial way” and accelerating growth, he said.

A rate increase in the U.S. will also benefit the rest of the world, said Rajan, who’s been critical of the global effects of developed economies’ record low interest rates.

Rajan, who took office about a year ago, has overseen a recovery of the rupee, the top performing currency in the past year among a basket of 12 Asian nations tracked by Bloomberg.

Rates Unchanged

He left India’s interest rates unchanged on Sept. 30 for a fourth straight meeting, continuing a fight against Asia’s fastest inflation as Prime Minister Narendra Modi takes steps to revive the manufacturing sector.

There are “disinflationary forces under way” helping India, including falling oil prices, he said. Prospects for agricultural harvests have improved after the monsoon turned out to be “mediocre” rather than “a terrible one,” he said.

Asked about new steps of monetary easing that are starting to take place in the euro zone just as the U.S. tightens its own stance, Rajan predicted “volatility in how emerging-market currencies behave relative to industrial currencies.”

The divergence in central bank policies “will have effects on the direction of trade and so on,” he said. Yet the appreciation of the stronger economy’s currency can draw in imports from the rest of the world, which “can be helpful for growth and can be helpful for the weaker economy.”

Before it's here, it's on the Bloomberg Terminal.