Brexit | Will Provide Liquidity, Correct Disorderly Market Behaviour: RBI Governor Raghuram Rajan
Promises to provide liquidity and correct any disorderly market behaviour following UK's vote to walk out of the European Union, saying that after initial investor worries over Brexit, funds should return to India
Reserve Bank Governor Raghuram Rajan on Friday (24 June) promised to provide liquidity and correct any disorderly market behaviour following UK's vote to walk out of the European Union, saying that after initial investor worries over Brexit, funds should return to India.
He said he was concerned about currency intervention by nations to create a competitive advantage and asked Central banks around the world not to cause currency devaluations.
RBI, he said, is watching all markets both internationally and domestically and "will provide domestic or foreign liquidity in appropriate amounts".
As of now, Rajan said in a concall from Basel, all the markets seem to be working and "if there are disruptions in the markets and liquidity is not available from certain quarters, we are fully ready to provide whatever liquidity is needed... Both dollar liquidity as well as rupee liquidity".
Asked about impact on outflows, Rajan said that India should not see any major foreign selling given its relatively better fundamentals relative to other economies.
He further said that there would not be outflows as long as the country keeps moving forward with reforms like GST, and international investors remain reassured about the growth prospects.
"I think money has to go somewhere," he said.
Volatility goes through every market as all are interconnected, and naturally, some concerns will spill over from one market to another, he said.
"But I think that at these times, it is important to remember that India is less exposed to the external sector than many other countries. To some extent, we are not a significant commodity exporter, which is going to be hurt by a significant slowdown in global growth...we are a commodity exporter in a number of areas where we might benefit especially as the price of oil comes down," he said.
Rajan is attending a meeting of heads of central banks from various countries in Switzerland. They get into 'Basel huddle' every second month at the headquarters of the Bank for International Settlement (BIS), popularly known as bank for central banks.
Friday's 'huddle' is taking place amid global financial turmoil following the Brexit.
"The economy itself is on a stronger growth path than elsewhere. And therefore, after the initial worries about the consequences of 'Brexit'...people will look around for places which are relatively less affected...after the initial concerns, money should return here," Rajan said.
The rupee has been relatively well behaved compared to many other currencies, he added.
"We haven't seen the 6-7 per cent change that has happened in say in Mexican Pesos or to some extent the Pound," he said.
Asked how long would volatility last, he said, "I don't think immediately there will be a significant adjustment because remember there is a two year period over which the exit is negotiated. So immediately nothing is affected."
He expressed hope that there would be a dramatic effect on trade other than overtime through both these policy effects as well as currency effects.
As for the Indian banks abroad, he said, the changes in currency values do affect them based on what kind of net exposures they have to different currencies, but broadly because there have been movements up and movements down.
"Unless you are overly exposed to one particular currency, I don't think immediately there is a cause for worry. But of course, we will monitor their balance sheet situations," he said.
On concerns over the $20 billion FCNR(B) redemptions later this year, Rajan said: "We are prepared in terms of the outflows. We have been taking delivery of currency steadily over time. And I think when the time comes, we will have plenty of additional dollars to repay whatever deposits flow out."
In line with global markets following the UK's vote to exit EU, the BSE index Sensex tanked as much a 1,000 points before regaining some lost ground towards the close of the session while the rupee fell below the Rs 68 mark against the US dollar.
Gold, considered a safe-haven investment, soared however to 26-month high in the bullion market here.
On coordinated efforts needed by central bankers globally, Rajan said that immediately what they can do is, if there is any area of liquidity tightness, they can inject appropriate amounts of liquidity there.
"So I think all the central banks are going to be prepared to do that. I think the more important question is if in fact this has some adverse consequences for global growth, which many are forecasting, then what more room do central banks have?
"My sense is this puts really more of the onus on authorities to ensure that there is no anticipation of copycat effects across the world, that we don't shut down on trade, don't shut down on immigration and don't shut down on capital flows," he said.
Rajan, who has been pitching for greater coordination among central banks to deal with such situations, was expected to reiterate this point amid fears that Europe may slip into recession and many more countries may call for similar referendums posing a huge risk to recovery in world economy.
He further said that Brexit clearly means that any company that has invested in the UK will have to figure out what its market is and how best to access that market.
"...a number of companies will think about how they invest going forward and the attractiveness immediately of investing in the UK is going to be a little more limited which is one of the concerns the Bank of England has expressed. But again, going forward, they will work out some kind of an arrangement and similarly for Indian firms there will have to be some kinds of re-consideration based on what happens," he said.
On the possibility of easing interest rate in the next monetary policy, the RBI Governor said: "As I said before, we are accommodative as well as data dependent. We will take a view when we have to."
The third bi-monthly monetary policy review is scheduled on August 9.