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Rajan says RBI can use forex reserves to curb volatility as rupee falls below 66/$

24 August 2015

Reserve Bank governor today sought to calm markets after foreign funds pulled down both stocks and the rupee, saying the central bank will not have any "hesitation" in using foreign exchange reserves to reduce currency volatility.

The rupee plunged by 66 paise to hit a level below Rs66 against the dollar for the first time in almost two years in the opening trade today on sustained capital outflows even as the US currency weakened overseas.

At the Interbank Foreign Exchange Market, the rupee fell by 66 paise to 66.49 a dollar in early trade.

A strong dollar demand from importers and banks and heavy losses in the domestic equity market weighed on the local currency, forex dealers said.

The rupee dropped even as dollar weakened against other major global currencies overseas amid mounting global economic slowdown worries.

The rupee had lost 29 paise to close at a two-year low of 65.83 against the US dollar on Friday on heavy demand for greenback from banks and importers.

Rajan, however, said, the central bank is not a ''cheerleader'' for the economy, elevating sentiments unduly, to deliver booster shots to the stock market so that it can soar for a while, only to collapse when reality hits.

The RBI governor also noted that India was in a better position relative to other countries.

India's macro-economic problems were "under control" although the country would need to focus on increasing domestic production as an effective way to protect itself against a global economic slowdown, he said.

The rupee slumped to as low as 66.49 per dollar on Monday, its lowest since September 2013, as foreign funds dumped stocks amidst fears of a China-led global economic slowdown.

Rajan also said the central bank's priority remained to help economic growth by bringing down inflation along a "glide path" that aims to keep consumer prices growing an annualised rate of between 2 and 6 per cent.

India's annual consumer price inflation slowed down to 3.78 per cent in July, its lowest level on record. But there are still aberrations like rising onion prices.

Interest rate cuts should only be delivered after sustained low inflation, and not as "goodies" doled out after public pleading, Rajan said.

"Rate cuts should not be seen as goodies that the RBI gives out stingily after much public pleading," he said in a speech to a banking event (See: RBI chief bats for 'Make in India for India' as export-led models flounder).

"Instead, what is important is sustained low inflation," he added. "And rate cuts are a natural consequence that the RBI has no hesitancy in delivering."

Rajan's comments come amidst stepped up pressure by corporates and finance minister Arun Jaitley on the central bank to cut rates as the economy struggles and price rises slow.

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