RBI has built defences against volatile capital flows, says Rajan

According to latest RBI data, foreign exchange reserves were at an all-time high of $353.88 bn

Reserve Bank of India Governor Raghuram Rajan on Friday said the country has layers of defence against volatility arising out of capital outflows, as the macroeconomic conditions have improved.

The key economic parameters such as fiscal deficit, current account deficit and foreign exchange reserves have improved since 2013, when the country was in the middle of a currency crisis, with the rupee hitting a historic low against the dollar.

"India has three layers of defence against volatility. The first layer of defence against volatile capital is our good macroeconomic environment, which we turned from the situation it was in 2012. Now, I think we are in a much better situation. With low current account deficits, low fiscal deficits, low inflation, we have established that," Rajan, who took charge of the central bank in September 2013, said here.

After taking charge, Rajan had unleashed a series of measures which helped the rupee to cut its losses and stabilise. "The second defence is the reserves. Today, our reserves are $350-billion plus, which has accumulated since the days of September 2013. The third layer of protection is from growth. Already, we are the fastest growing large economy in the world," he said.

According to latest RBI data, foreign exchange reserves were at an all-time high of $353.88 billion for the week ended May 15. The reserves fell to $274 billion in August 2013, when the rupee hit its nadir. However, Rajan also said building foreign exchange reserves "beyond a point" was equivalent to intervention.

"Some exchange rate intervention for precautionary purposes is necessary. You need to build reserves if you are an emerging market but beyond a certain point, it probably is direct intervention," he said.

Rajan also said the World Bank and Asian Development Bank (ADB) should be ready to bring in long-term risk capital for infrastructure projects in emerging markets.

The China-backed Asia Infrastructure Investment Bank is expected to launch by year-end with an aim to provide long-term infrastructure funding for its emerging market members, providing competition to the World Bank and the ADB.