Rajan expects US Fed to hike rates by 25 bps next week

KOLKATA: Reserve Bank of India governor Raghuram Rajan on Friday primed the markets for a quarter of a percentage point rate hike by the US Fed next week — a move that is expected to cause ripples across the world, including India. A US rate hike is expected to result in fund outflow from India, which will put pressure on the exchange rate and equities markets.

"The US Fed has prepared the ground and we are expecting that it will raise rates anywhere between one and 25 basis points," Rajan told reporters after the central bank's board meeting here (100 bps = 1percentage point). He said there is a 70-75% possibility of a Fed rate hike. "Whatever decision the Fed takes, we are prepared for any eventuality," Rajan said.

Earlier this week, the RBI said it was prepared to intervene in the spot and forward foreign exchange market and would also now start intervening in exchange-traded currency derivatives. In preparation for this intervention, the RBI has beefed up its forex reserves, which have risen by $483 million to $352 billion, despite valuation losses in gold reserves.

Bank stocks fell on Friday after the governor said that the RBI would review how banks are using the headroom provided to them to deal with bad loans. "We have spent much of the last few quarters creating a variety of bank powers to deal with stressed assets. Having given those powers, we are now looking at how those powers are implemented," Rajan said. "These are meant not so much to postpone the day of reckoning but to actually deal with stressed assets in an effective way," he added.

Earlier, RBI deputy governor Urjit Patel said "after analysing the language used by Fed", it is almost certain that the US central bank will increase interest rates next week.

He said one could expect some changes in financial flows in emerging markets.

Commenting on non-performing assets, Rajan said the RBI wanted to have a fresh look at the health and banking sector assets. When asked about the UB Group, he said in some cases banks are a little late but there are lot of impediments as well. Rajan also made it clear that he feels that banks should have greater power to recover dues. Commenting on open market purchase of securities, he said that it would depend on RBI policy on short-, mid- and long-term liquidity.

Elaborating on the board meeting, Rajan said that the board has reviewed the functioning of foreign exchange department, financial inclusion and development department, department of cooperative bank supervision and non-banking regulation and supervision. "The plan for a coherent national strategy for financial literacy involving all stakeholders and improving the effectiveness of financial literacy was also discussed," he said.