India is no more in the club of ‘fragile five’! Know who is saying this.

Unlike 2013, few international investors are talking about leaving India despite an emerging market currency turmoil. Reserve Bank of India (RBI) Governor Raghuram Rajan told ET in an exclusive interview why the present scenario is different in India, and how the country is no more in the club of 'fragile five' or 'troubled ten.'

On being asked about how the atmosphere has changed since he has taken charge of the central bank: Rajan said: “This time you have the difference that you have the confidence that we are actually quite healthy. Last time, you did not have that confidence and that is the big difference this time. You know that this will pass and, at some point, markets wake up and, at that point, start differentiating.”

He earlier said how central banks were wrong about 'boosterism' and then came the Chinese central bank's actions. On being asked about it he said: “The point I was trying to make is that our best ability is to improve the environment for a strong sustainable growth and, for a central bank, that is best done by keeping inflation at a reasonably low rate. How low? That is for the government to decide.”

“The government has told us what that rate, that band should be. Beyond that, you can do short-term changes in sentiment. But unless it is accompanied by a change in fundamentals, markets go up for a few days, then say look nothing really is happening and perhaps these guys are playing to the gallery and that kind of boost does not last very long.”

Replying to a question about issues being faced currently by India, he said: “Well, tell me which other economy is at 7.5% growth? Obviously, we want growth to be faster than what it is today. Obviously, there are pockets that are hurting, absolutely. But I think you would be hard pressed to argue that this is the kind of emergency we saw in 2008 ourselves or the kind of emergency that some other countries are facing across the world today. And you have to be a little careful about disrupting the narrative at a time when the narrative is India is picking up, India has a lot of opportunity.”

On being asked about what policy makers have to offer to save the world, he said: “Well, we have to be vigilant and see what... I mean, I think the lesson of 2008 is markets are so interconnected that what was once thought of as a $100 billion mortgage problem in the United States, $100 billion of losses that had to be allocated, turned out into a huge global problem because of uncertainties about which balance sheets were infected and by how much. And also, it became the starting point for other fragilities that had built up for example, the fact that European banks had borrowed tremendously in the US, short term, to lend back in the US.”

Speaking about the Chinese yuan devaluation, he said some have more control over their currencies than others. “What I would hope over time as we see these kinds of discussions increase, and now there is more talk about the problems associated with unilateral depreciation. I think that as we see the problems associated with this, there will be more of a dialogue which focuses on appropriate rules of the game. It is going to take time and if you look at anything in international fora, it takes a long time but at the very least countries are sensitised to the issues and now they have to start debating what to do about it.”

On being asked about implications of the Yuan induced turmoil on Rupee, he said: “One of the difficulties in the modern world with substantial capital flows is there is some penalty to being seen as attractive, which is you attract substantial capital flows and that tends to cause some currency appreciation which tends to make production domestically somewhat less competitive.”

“Now, it is not only a problem there has some benefits also the capital flow certainly come into fuel investment and that is a good thing. But figuring out how to manage this is really the central difficulty that emerging markets have. I mean one simple answer is focus on macro stability, focus on creating good institutions -- all that is very well. But that attracts even more capital flows. And so we certainly need to do that and we have been doing that,” he said.

Talking about easy liquidity that could lead to high inflation, or even hyperinflation and that hasn't happened, he said: “That was not the fear that most people put weight on - that the liquidity would lead to high inflation. Because, earlier on, there was a sense that liquidity can be withdrawn if necessary, or trapped by the Fed paying interest on its reserves, so those reserves would not necessarily go out to be free money that would pump up inflation.”

“I think the greater fear was that with labour markets tight, that at some point you would see wages start picking up strongly with labour markets employment growing, at some point you would reach the end of the slack, people who left the labour force would not be coming in, the employable would be very limited and wages could go up quite suddenly. That would then signal the possibility of higher inflation,” he added.

On being asked about if the central banks are the only game in town now, he said: “I will say this: the central banks can actually support growth beyond a point. When there is no inflation, they can cut interest rates and that is the way they support growth, but if you cut interest rate to the bone, there is nothing more to cut. It is very hard to support growth beyond that. The other instruments have to kick in.”

(Image: Reuters)