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India's central bank chief says country is not in crisis
October 10, 2013 / 10:22 PM / 4 years ago

India's central bank chief says country is not in crisis

WASHINGTON (Reuters) - India’s central bank chief on Thursday said his country is not nearly as troubled as investors fear and stressed that the government has plenty of money to meet its obligations.

Reserve Bank of India Gov. Raghuram Rajan answers a question during a CNN Debate on the Global Economy, along with other bank governors and finance ministers, as part of the IMF and World Bank's 2013 Annual Fall Meetings, in Washington, October 10, 2013. REUTERS/Mike Theiler

“There is no way we are close to being a country in financial or economic crisis,” Raghuram Rajan, governor of the Reserve Bank of India, said while in the U.S. capital to attend the annual International Monetary Fund and World Bank meeting.

Even more than other emerging markets, India came under pressure this year after the U.S. Federal Reserve hinted it could start winding down its massive stimulus program before year end.

Investors, anticipating higher interest rates, pulled money out of risky assets in developing countries, causing stocks and currencies to plummet and pushing up local borrowing costs.

India was punished more severely than most as investors wondered how the government, already struggling with high inflation and a slowing growth rate, would finance a budget deficit in the face of capital flight. The rupee hit a record low against the dollar in August.

But Rajan said that with external debt amounting to 22 percent of total output and foreign exchange reserves 15 percent of output, “We can pay back all the short-term debt tomorrow.”

About 90 percent of government debt, he added, was denominated in rupees, which removes foreign exchange risk.

“We are by no means, no means, anywhere nearing having external financing difficulties or internal financing difficulties,” he said. “Government credit is good, solid. There is absolutely no difficulty to the government in borrowing.”

Rajan, who previously worked for the IMF, surprised markets last month in his first policy meeting at the helm of the central bank by raising interest rates by 25 basis points to ward off rising inflation and scaling back some of the emergency measures recently put in place to support the ailing rupee.

The rupee has rebounded by about 12 percent since August but remains 10.6 percent lower on the year.

While structural problems such as infrastructure, education and regulation need to be addressed, “those are not needed to solve the current growth problem,” Rajan said.

To restore growth, ”the things we need to do are relatively small, he said. “Getting growth back on track is not going to be as difficult - we really have a perception problem.”

Speaking at a separate event in Washington, Indian Finance Minister P. Chidambaram said the Fed’s surprise decision last month not to begin winding down its huge stimulus amplified the extent of the market turmoil in emerging markets.

“They should have clearly communicated their policy and consulted with other countries,” he said.

Rajan said that the most of the “fast money” that left India and other emerging markets after the Fed’s announcement is already gone. “So in that sense, it may be that we don’t have really as much of an issue.”

Some Indian companies with high foreign currency debt could face difficulties, he said, but do not pose system-wide risks to the financial sector.

“There may be some that get into some difficulty and they will have to renegotiate. But I don’t see that as a systemic issue,” Rajan said, adding that a “very small fraction” of the debt is held by Indian banks.

Editing by Dan Burns and Leslie Adler

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