US rate hike: RBI prepared to deal with volatility in markets

The Reserve Bank of India is fully prepared to deal with any volatility in Indian markets, due to US Federal Reserve's policy action on interest rates, and normalcy will be ensured, Governor Raghuram Rajan said on Wednesday.

It is widely expected that the Fed could give signal on rate hike as the US economy is showing signs of improvement. This may result in the flight of capital from the emerging markets including India.

"There could be volatility in (stock and currency) markets if Fed hikes rate... (but) normalcy will be restored in the market even if there is volatility," Rajan said after meeting Finance Minister Arun Jaitley.

India is much better prepared if Fed moves on rates, he said. The Federal Open Market Committee, the Fed's policy arm, is expected to take a call on interest rate or could give signal on the interest rate in its post-meeting statement later tonight.

Rajan further said that RBI will take a cue from the Fed policy statement. India is prepared to deal with foreign fund outflows as the country has significant forex reserves.

After rising for consecutive weeks, India's foreign exchange reserves marginally declined by $286.3 million to $337.793 billion in the week to March 6 despite a rise in foreign currency assets (FCAs).

Rajan said that current account deficit is under control. The current account deficit has narrowed to 1.6 per cent of the GDP in the October-December quarter from 2 per cent a quarter earlier comforted by easing oil prices.

On Tuesday, IMF chief Christine Lagarde warned of a repeat of high market volatility and capital outflows when US Fed hikes rates next time and asked India and other emerging markets to be prepared for such an eventuality.

The meeting comes days ahead of the Finance Minister's address to the RBI board on the Budget 2015-16 on March 22. Besides, RBI is scheduled to announce its first bi-monthly monetary policy statement for 2015-16 on April 7.

It is also expected that RBI could take a call on rate cut in the light inflation hitting a record (-)2.06 per cent in February - keeping it in the negative zone for the fourth straight month.

The apex bank on March 4 had cut interest rate by 0.25 per cent. The rate cut from 7.75 per cent to 7.50 per cent, was prompted by inflation remaining low, had come within days of Finance Minister Arun Jaitley announcing in the Union Budget that the government was committed to fiscal consolidation.