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Business News/ Industry / Banking/  Raghuram Rajan says economy recovering, exposure to Greece limited
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Raghuram Rajan says economy recovering, exposure to Greece limited

RBI governor also cites better-than-expected monsoon rainfall in June as a factor portending higher growth

According to the RBI, the Indian economy continues to be in a recovery phase with some signs of a pick-up in capital investment. Photo: Pradeep Gaur/MintPremium
According to the RBI, the Indian economy continues to be in a recovery phase with some signs of a pick-up in capital investment. Photo: Pradeep Gaur/Mint

Chennai/Mumbai: India’s economic growth is set to accelerate as capital investments gather pace and the government tackles bottlenecks that have stalled industrial projects, Reserve Bank of India (RBI) governor Raghuram Rajan said on Thursday.

“We see some signs of capital investments picking up. There is a continuing need, which the government is trying to address, of putting some of the stalled projects back on track," Rajan said after the central bank’s board meeting in Chennai.

He also cited better-than-expected monsoon rainfall in June as a factor portending higher economic growth.

But while recent developments in the economy have been encouraging, the RBI chief cautioned that the “spade work to create sustainable growth" was something that needs to continue.

RBI in June forecast economic growth to be 7.6% in the year to next March. The government said in May that the economy grew 7.3% in the last fiscal year, using a new method of calculating gross domestic product.

Rajan’s latest statement is more optimistic than his prognosis in June. On 2 June, after effecting the last of three interest rate cuts this year, Rajan said the central bank was “under no illusion that the economy, especially investment, is up and running".

Since then, data from researcher Centre For Monitoring Indian Economy Pvt. Ltd has shows that new investment announcements during the quarter ended 30 June rose 33% to 1.15 trillion from a year earlier.

While there were 498 new investment proposals during the period, intentions to set up fresh capacities were the lowest compared with the preceding three quarters, according to CMIE data.

Rajan cautioned that weak global economic growth may continue to crimp demand for Indian exports, which contracted in May for the sixth month in a row.

“Exports are an area of relative weakness but they have been weak across various Asian economies with the exception of China. Of course, the weakness of the global economy is a big factor," he said.

Better-than-expected monsoon rain in June after a delayed arrival is encouraging and will aid economic growth, the central bank governor said.

It is also helping the central bank to manage inflationary expectations.

The monsoon may still slow down over the next two months, with the nation’s weather office sticking to its forecast of deficient rainfall for the second year in a row.

The central bank, Rajan said, would need to see further evidence before reaching its own conclusions on the matter and deciding on a future reduction in policy rates.

In its June monetary policy review, the central bank raised its inflation projection for January to 6% from 5.8% earlier. Rajan said then that room for future rate cuts may be limited because of upside risks on inflation.

Still, the better-than-expected monsoon rain in June and sowing turnout so far, a modest rise in support prices for various crops and a favourable base effect in some months would keep food inflation in check in the near term, ratings company Icra Ltd said in a report released on Thursday.

This has increased the likelihood of a repo rate cut during this quarter, as long as external developments do not result in excessive rupee volatility, it added.

While a good monsoon and improving capital expenditure are good signs, any future rate cuts will depend on how macroeconomic factors evolve, said Samiran Chakraborty, head of research at Standard Chartered Bank India.

By the time the next policy is announced, there might be more clarity on various data points and the uncertainty related to international markets arising out of the Greece crisis, he said.

“So RBI will be in a much better spot to decide on rate cuts," Chakraborty added.

Talking about the impact of Greece on the local economy, Rajan said India’s direct exposure to the European nation is very limited.

“There is of course indirect exposure. For instance, how will the euro react to Greece? Or could developments in Greece could lead to a risk-off situation among global investors? But after the initial burst of volatility, investors will start differentiating and they will see that the India story continues to be a good one," Rajan said, adding that strong foreign exchange buffers will help deal with short-term volatility.

Rajan said that RBI would continue to reassess the limits for foreign institutional investors (FIIs) wanting to invest in government debt.

He said that such reassessments would take place twice a year and that history would suggest that the central bank has not brought down the limits.

This year, investments worth $6.4 billion has come into India’s debt market through FIIs. India’s current limit of $25 billion for ownership of government bonds by FIIs is fully utilized, leading to calls for increasing it. The country has also set aside another $5 billion for long-term foreign investors.

“The most important point that the governor made was on increasing limits of FII investment in debt, after reassessing it twice a year. Earlier when the finance ministry was suggesting such an increase, a lot of people thought that the RBI would oppose this. But they seem to be comfortable with the idea." Chakraborty of Standard Chartered said.

Rajan acknowledged that the asset quality of banks continues to be a problem.

“We are working with the banks to ensure that they recognize the problem early and take actions to remedy it. Clearly, the government has to play a role here as well by helping resolve the stuck projects and that is being worked on," said Rajan.

He added that RBI is tracking the implementation of schemes such as the 5/25 refinancing scheme to ensure they are not used to evergreen unsustainable projects.

The 5/25 scheme allows lenders to extend the tenure of infrastructure loans to 25 years with the option to refinance them every five years. A number of infrastructure companies are seeking such refinancing from banks.

“I should also mention that the government has been in discussion with us but also thinking of adding more capital to the banks and that will help because it will give them a buffer... The way to get out of financial stress is to address the problem early... And some of the banks may need some capital to do that. Hopefully this capital infusion will help," Rajan said.

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Published: 02 Jul 2015, 01:56 PM IST
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