RBI has weapons in armory to control Rupee and avoid inflation says Raghuram Rajan

Last Updated: Tue, Sep 11, 2018 17:25 hrs
Raghuram Rajan

Financial Seer and the Reserve bank of India's former Chief Raghuram Rajan asserted that the Rupee will not fall in a free-fall since the central bank would appropriately raise interest rates and control inflation.

The Indian Rupee which has lost at least 13% in the year so far crashed to an all-time low of Rs 72.67 on Monday on the background of a strengthening in the US Dollar and rise in crude prices.

Escalating trade war and concerns surrounding emerging market economies have also lead to a rally for the US greenback.

In an interaction with CNBC TV18, Rajan said that "It is very important that RBI continues to signal as it has done so far on its concern about keeping inflation on track, about raising interest rate whenever appropriate, to fulfil its inflation objective ... that gives investors confidence that rupee is not going to go in for free fall because ultimately inflation will be in control ...," he said.

When asked whether the central bank may consider NRI bonds to check rupee depreciation against the US dollar, Rajan referred to them as "weapons you have in the armory".

He did not explain at what time the Central bank may use its weapons.

Rajan said India had to pay attention to the aggregate fiscal deficit, considering state governments had increased their fiscal deficits.

"The fact that India is growing quite strongly gives some positive but in general we have to pay attention," he said.

Rajan also stressed that India cannot "afford an election year budget" going forward given the kind of turmoil in the financial market.

"It has to be a responsible one," he added.

Rising Bad Loans

The former governor in a note to a Parliament's estimates committee evaluating non-performing assets of public sector banks called for examining MUDRA loans and Kisan credit cards for potential risk.

Rajan also said, "A larger number of bad loans originated in 2006-2008 when economic growth was strong, and previous infrastructure projects such as power plants had been completed on time and within budget. It is at such times that banks make mistakes. They extrapolate past growth and performance to the future. So, they are willing to accept higher leverage in projects, and less promoter equity," he said.

In the note prepared on request of committee Chairman and BJP leader Murli Manohar Joshi, the former RBI chief said that the Credit Guarantee Scheme for MSME run by SIDBI is a growing contingent liability and needs to be examined with urgency.

Also Read: Larger number of bad loans in 2006-2008: Rajan