MUMBAI, Aug 26: Global financial markets may be in turmoil but Indian investors shouldn't worry too much - that's the message from Reserve Bank of India Governor Raghuram Rajan, who took over the job two years ago at a time the rupee had suffered a precipitous drop, then helped to nurse the currency back to health.
An all-round improvement in macroeconomic fundamentals since then has made India almost bullet-proof against the vagaries of financial markets and the biggest differentiator from two years ago is the confidence this had engendered.
"There is confidence that we are actually quite healthy," Rajan told ET in an interview ahead of his departure for the annual global economists conclave at Jackson Hole in the US.
"Last time you did not have the confidence, that is the big difference this time. We know this will pass and at some point the market will wake up and at that point start differentiating."
India has been among the best-performing emerging markets amid a global currency rout against the dollar in a capital flight not seen since the collapse of Lehman Brothers in 2008. Investors favour India since it has avoided the mistakes of other central banks that kept interest rates low to stimulate growth, and a government that is more prudent with its finances.
"I don't think we are in panic mode by any stretch of imagination," said Rajan. "We are in vigilant mode. But I think there is a general sense that we are in a much better situation than we were in 2013."
India's current account deficit, which peaked at 4.7% of gross domestic product in FY13, narrowed to 1.3% of GDP in FY15.
Inflation as measured by the consumer price index, which was running at an average of more than 9%, slowed to 3.8% in July. Foreign exchange reserves are at a record high of $354.4 billion.
The devaluation of the Chinese yuan on August 11 sparked a global selloff in equities, commodities and currencies. The fear of a global economic slowdown has engulfed the market and the Chinese central bank on Tuesday responded with an interest rate cut and a lowering of reserve requirements.
But Rajan, who had warned of an impending financial crisis in 2005, said the panic should soon subside. "Markets turn panicky only for limited periods of time," said Rajan. "Even in the worst environment of the last 50-60 years, during the 2008 crisis, it was a few months after which it turned normal. I have no doubt that we have enough ammunition, reserves, good policies to withstand that."
Price to be paid
Rajan suggested that there was a price to be paid for being seen as a sound investment destination at a time of global market travails. The key is to strengthen the system.
"There is some penalty to being seen as attractive. You attract substantial capital flows and that tends to cause some currency appreciation which tends to make production domestically somewhat less competitive," Rajan said.
"Ultimately, in the long run, we need to immunise our system from being overly responsive to fluctuations in exchange rates. Unnatural movements in other currencies do certainly impinge on us and we would not want to take the route of making ourselves a less attractive destination for investments which would be one quick and sure way of depreciating our own exchange rate. I would rather say that let us focus on making our economy more flexible so that we can absorb some of these changes."
Given the slump in commodity prices, this would be a great opportunity to win the battle on prices, he suggested. That may be read as a signal on interest rates.
"There is no better time to bring it down - you have got everything working towards lower inflation," Rajan said. "If people's expectations get settled at this level, we will have won a victory for a long time." RBI's next monetary policy announcement is scheduled for Sept 29, although there have been calls for a rate cut before then on account of slowing inflation amid uncertainty about growth. ?ET Bureau