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Good policy essential to India’s stability: Rajan

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Terming a sharp slowdown in China as a “ significant risk” for the global economy and the South Asian Association for Regional Cooperation ( Saarc) region in particular, Reserve Bank of India ( RBI) Governor Raghuram Rajan said on Thursday the regulator had been moderating any extreme currency volatility through its intervention.
He said India has in place a four- pronged defence against external shocks — “ good policies; prudent capital flow management and swap arrangements; preventing extreme forex volatility; and building reasonable forex reserves”.
“Good policy has been essential to our stability,” Rajan said while listing out various structural reforms undertaken by the government to enhance growth.
“RBI has been moderating periods of extreme volatility in the currency through exchange intervention, though only when the movement is excessive, and increasing access to foreign exchange reserves, including pooling of reserves,” he said.
In his inaugural speech at the SAARCFINANCE Governors’ Symposium held here, Rajan also said India’s swap arrangement with a number of Saarccountrieshadbeendrawn on by some to alleviate shortterm foreign exchange needs, andhadhopefullybeenhelpful.
Rajan said the sharp slowdown of the Chinese economy remains a significant risk for the global economy and the Saarc region. “ The sharp contraction in China’s imports over the past year, for instance, had already led to spillovers through the trade, confidence, tourism and remittance channels and Saarc nations had not been able to avert its impact. More negative externalities could follow as Chinese economy adjusted to a more sustainable path. “Further, China already suffered from the twin- ailment of overcapacityandhighleverage. Bad loans in the banking systemwerelikelytogrowovercurrentlevelsandinadditionthere might be serious weaknesses in the shadow banking system, which could feedback to banks. “Both could be significant downside risks as they could have second round effects for Saarc economies. Chinese growth would depend not just on its policies, but also on growth elsewhere in the world,” he said.
Business Standard New Delhi,27th May 2016

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