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India is ready to deal with any foreign fund outflows: RBI governor

20 Mar 2015 Evaluate

Reserve Bank of India (RBI) Governor Raghuram Rajan has doubled the cheers of worried investors and India Inc by saying that India is ready to deal with any foreign fund outflows as a result from the rate hike.  Though, the RBI governor did not rule out the possibility of near-term volatility in the markets, he said that in the medium term, markets will be back to normal.

Rajan said that the country has significant forex reserves and current account deficit is under control. India's foreign exchange reserves stood at $337.793 billion in the week to March 6. The governor also pointed that the 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.

Reserve Bank of India Governor has long warned of the risk to emerging economies when the US Federal Reserve makes the first rise in its zero percent interest rates since the 2008 financial crisis and been actively buying dollars, helped by a net inflow of $54 billion of foreign money since the start of 2014. As a result India has built up record foreign exchange reserves of nearly $340 billion to insulate the economy from capital flight in case the US Fed hikes rate.

Earlier, the US Fed officials indicated interest rates will rise at a slower pace than previously forecast. Fed Chair Janet Yellen noted that removing the word patient from the statement doesn't mean the central bank is going to be impatient. The Federal Reserve has kept its key short-term rate near zero since late 2008 to bolster the economy. Recently IMF chief Christine Lagarde warned of a repeat of high market volatility and capital outflows when US Fed hikes rates next time and asked emerging markets to be prepared for it.

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