India has built up defences vs volatile capital flows - RBI's Rajan

By Suvashree Choudhury

CHENNAI (Reuters) - Reserve Bank of India Governor Raghuram Rajan said on Friday the country has built up layers of defences against volatile capital flows in financial markets by building up its foreign exchange reserves, improving its economy, and focusing on economic growth.

Rajan took the helm of the RBI in September 2013, when the country was in the midst of its worst currency turmoil in more than two decades as foreign investors were selling heavily because of concerns about India's low currency reserves and a record high current account deficit.

But India is now widely seen as less vulnerable to outflows as the RBI has steadily built up its currency reserves, which hit a record high of $353.88 billion as of May 15.

The economy is also starting to show signs of improvement, with some analysts expecting growth to surpass China's this year. India is due to report gross domestic product growth data next week.

At the same time, government measures to curb gold imports and slumping oil prices have sharply narrowed the country's current account deficit, with analysts expecting a surplus in the January-March quarter.

"The first layer of defence against volatile capital is our good macro economic environment," Rajan said, speaking at an academic institute in Chennai.

"The second thing which gives us protection is our reserves," he added. "The third layer of protection, I think, would be growth. ?We can show strong growth going forward. People want to come in, people want to invest."

However, Rajan also said that building foreign exchange reserves "beyond a point" is 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."

On Friday Rajan also said that the World Bank and Asian Development bank 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.

(Writing by Himank Sharma; Editing by Hugh Lawson)