Published On: Sat, Dec 12th, 2015

Rajan sees probability of 25 bps increase in interest rate by Fed

Looking at the market probabilities, our sense is there is 70-75 per cent probability of a Fed increase. I also think Fed has prepared the way carefully for rate increase so it is likely at this point they will go ahead and raise rates, says RBI Governor.

Reserve Bank of India (RBI) Governor Raghuram G Rajan said there was a high probability of the U.S. Federal Reserve increasing the benchmark interest rate by 0.25 per cent next week and the Indian central bank is prepared for any eventuality.

“Looking at the market probabilities, our sense is there is 70-75 per cent probability of a Fed increase. I also think Fed has prepared the way carefully for rate increase so it is likely at this point they will go ahead and raise rates,” Mr. Rajan told reporters after a meeting of Central Board of the RBI. The expected rate increase will be the first such in a decade.

RBI Deputy Governor Urjit Patel said while the U.S. Fed is almost certain to review rates, it is important to “analyse the language used by the Fed when making this important monetary policy change.”

To a question on volatility due to divergence in the monetary polices globally, Rajan said that the focus must remain on formulating sound domestic policies.

“Some volatility will emerge because of market forces. We have seen that play out on a day-to-day basis, now-a-days. Some of the volatility that you have seen in the market is because of anticipation of Fed movement. Perhaps also because of divergence… I think going forward, the best defence against global volatility is sound domestic policies,” he said.

Domestic policies must focus on creating conditions for sustainable growth and the RBI is ‘totally focussed’ on the same. The RBI governor said that the Central Board reviewed the current economic situation, global and domestic challenges and policy responses. It also reviewed the functioning of the departments of foreign exchange, financial inclusion and development, co-operative bank supervision and non banking regulation and supervision during the board meeting.

The central bank is taking stock of how banks are using the various powers extended to them to tackle bad assets. The comments gain significance in wake of reports that some banks are using facilities such as ‘strategic debt restructuring (SDR)’ to avoid provisioning for bad loans. SDR allows banks to convert debt to equity (through which they can take control of the management) and turn prospective bad loans to standard assets for a specified time.

“We have spent much of the last few quarters creating a variety of bank powers to deal with stressed assets. SDR is just one of them,” Mr. Rajan said.

“Having given those new powers, we are now looking at how those powers are implemented,” he added. SDR was introduced in June, 2015.

[source:-The Hindu]