The Reserve Bank of India has not raised the repo rate to fight off the recent global emerging market sell-off, but to tamp down inflationary pressures, Governor Raghuram Rajan said on here Wednesday.
“I think for (some) time we have been saying very clearly we are focussed on preserving the value of the rupee, in the domestic context,’’ he told analysts on a conference call a day after the central bank unexpectedly raised its key rate by 25 basis points.
“Preserving it in the domestic context will preserve it in the international context. Preserving in the domestic context means bringing inflation under control. Once we do that, we believe investor confidence naturally follows,’’ he said.
Explaining the reason for the recent volatility in the domestic market, Dr. Rajan said the sell-off was due to outflows from short-term funds.
“We believe that as far as we are concerned, there is some build-up of short-term flows in January, and some of them are existing,” he said.
He said the current sell-off was temporary in nature, and the country was well prepared to meet any kind of volatility. “We don’t think this is a longer-term situation, unlike we saw in July and August (last). We are much better prepared this time, and to the extent it happens, I am not overly worried.”
On a question over the Turkish central bank hiking interest rates, Dr. Rajan said, “Turkey-like policy action is hypothetical, I won’t venture (out) there.”
Explaining the rationale behind the hike, Dr. Rajan said, “We are in an environment where we have got high inflation with low growth. So, navigating in these circumstances has to be done with more care than in a situation where you have got high inflation and high growth and you know what needs to be done and there is complete consensus on that.”
Seeking support from politicians, Dr. Rajan said, “Ultimately, inflation is both a monetary and a political issue, and we need the political establishment to understand the importance; and I am confident that it will and it is.’’
Stating that the public at large knows the purpose of the RBI, he said the central bank was trying to take the public along in its fight against inflation and added that he felt confident that the RBI was succeeding in this effort.