Adequately buffered against impact of Fed rate hike: Rajan

Moneycontrol Bureau

RBI governor Raghuram Rajan Tuesday said the Indian financial system was adequately buffered against the impact of a likely rate hike by the US federal Reserve this year.He was briefing the media on the monetary policy review.

Rajan said even otherwise the Fed was not going to be a key factor in determining domestic policy, adding that the focus would be on the domestic economy and local requirements. Given the strong foreign exchange reserves at the moment, the RBI will be able to that, Rajan said.

On a question relating to further rate cuts, Rajan said the timing would depend on the room available in the context of inflation.

And while banks have so far not reduced interest rates, Rajan said market forces will force banks to lower rates before long.

Rajan said he did not expect the growth environment to be tepid, and said the central bank will be coming out with more structural reforms soon.

Among other things, the RBI will make it easier for individuals to buy bonds, and develop financial benchmarks for banks to price their products.

The RBI plans to push banks to set base rates based on the marginal cost of funds. At present, banks are following different methodologies in computing their base rate – on the basis of average cost of funds, marginal cost of funds or blended cost of funds (liabilities). According to the RBI, base rates based on marginal cost of funds should be more sensitive to changes in the policy rates. The RBI is also exploring the possibility of allowing Indian companies to issue rupee bonds abroad, Rajan said.

And while the RBI would endeavour to contain rupee exchange rate volatility, it will not be focussed on holding the rupee at some particular level, Rajan said.