Banks markets strong enough to withstand extreme volatility: RBI Governor
He also predicted that such monetary policy changes would have a negative impact on economic growth and employment. Powell had sounded slightly dovish on interest rates at the previous policy meeting.
Jerome Powell, the head of the US Federal Reserve, surprised the markets by stating last week at the annual Jackson Hole summit of central bankers and economists that he would have to keep raising federal fund rates to control inflation, which continues to be the biggest threat to the largest economy in the world.
Additionally, he foresaw the negative effects that such monetary policy moves would have on employment growth and growth. On interest rates, Powell had sounded somewhat dovish at the previous policy meeting.
He assumed that such monetary policy changes would have a negative impact on economic growth and employment. Powell had sounded slightly dovish on interest rates at the previous policy meeting.
At the annual Jackson Hole gathering of central bankers and economists last week, US Federal Reserve Chairman Jerome Powell shocked the markets by declaring that he would have to keep raising federal fund rates in order to control inflation, which continues to be the biggest threat to the world’s largest economy.
He predicted that such monetary policy changes would have a negative impact on economic growth and employment. Powell had sounded slightly dovish on interest rates at the previous policy meeting.
He was sure to point out, though, that domestic markets have now rebounded from the lows reached in the immediate aftermath of the Jackson Hole incident. As a result of proactive and strategic policy interventions to lessen the effects of the two black swan events that occurred in quick succession — the COVID-19 pandemic and the war in Europe — our financial markets have shown resilience, which is a reflection of our strong macroeconomic fundamentals.
“Our banking system is in good shape. It has better asset quality and is well-capitalized and provisioned. This is an important pillar of our financial stability and is expected to have beneficial effects on the financial markets “added Das.
He said that while markets frequently tend to overreact to new information from central banks and other regulators, amplifying volatility, overshooting frequently precedes a subsequent realignment with underlying fundamentals in situations like these, where geopolitical tension and synchronized monetary policy tightening come together.
Das outlined the benefits of the banking system and the economy, noting that, despite other major economies being in or nearing recession, ours is still one of the fastest growing.
It should be emphasized that while the US and the UK had a decline in Q1, the Eurozone is still struggling with the Pandemic, and China’s progress in Q1 stopped due to repeated lockdowns in its major cities.
Investors are given confidence by such a growing gap, which is plainly shown by the dramatic increase in portfolio inflows since July. According to him, the inflows in August alone totaled USD 7.5 billion, which is more than 16 times the net inflows in July.
However, substantial inflows were done after foreign funds continued to withdraw up to USD 29 billion throughout the first seven months of the year.
The governor cites the lessening of supply chain pressures and the softening of commodity prices as further encouraging signs following the trade shocks caused by the epidemic and the start of the war in Ukraine.
CPI inflation reached its peak in April as a result of the lessening of imported inflation pressures.
He added that the Indian basket crude averaged USD 97.4 per barrel in August, which is less than the USD 105 per barrel that we had projected for the entire year. He said that our inflation is lower than that of many of our trading partners and is likely to trend lower starting in the upcoming quarter.
Das pointed out that, in an era of severe shortages and skyrocketing prices, our country’s food security, which results from our substantial buffer inventories of food grains, is another factor supporting price stability.
Foreign exchange reserves of USD 561 billion (August 26) provide a buffer against external shocks on the external front.
The RBI has been defending the rupee for months, so the currency fund is more than USD 70 billion below its peak of USD 642 billion in September 2021.
And these underlying factors have kept the rupee strong and allowed it to advance steadily throughout the current fiscal year so far. He added that while the dollar has gained 11.8% so far this fiscal year, the rupee has lost only 5.1%, placing it among the best in the world. This is despite the severe devaluation of other major currencies.
He added that the stability of the currency rate is a fundamental component of our overall macroeconomic and financial stability and that the RBI often intervenes in the market, providing liquidity and confidence to support its smooth and normal functioning.
“And the RBI has worked to stabilize expectations in the face of the unusual events that are continuously happening throughout the world and allow the exchange rate to reflect the fundamentals rather than overshoot. While benefiting from a market-determined exchange rate regime, avoiding excessive and unnecessary volatility is a desirable policy goal for all stakeholders “added Das.
Das reassured the audience by saying that going forward, the monetary policy will be vigilant, quick-thinking, and tailored to maintain price stability while fostering growth. In accordance with the updated liquidity management framework, RBI is still committed to supporting the market whenever necessary via two-way operations.