RBI's Rajan Says China Slowdown Still Significant Risk For Global Economy

(RTTNews) - A sharp slowdown of the Chinese economy remains a significant risk for the global economy and South Asia among challenges arising from uncertainties such as US rate hike and "Brexit", Reserve Bank of India Governor Raghuram Rajan said Thursday.

"Possible moves by the US Fed, a potential rebound of oil prices, possible Brexit, geopolitical risks in the Middle East and volatility in financial markets due to risk-on or risk-off sentiment are some of the possibilities we have to anticipate," Rajan said in a speech delivered at the SAARCFINANCE Governors' Symposium in Mumbai.

A common uncertainty that confronted the SAARC nations was the possible sharp slowdown of the Chinese economy, the central banker said.

"This still remains a significant risk for the global economy and our region, though Chinese policymakers have a record of over three decades of astute policy making, which suggests they may significantly mitigate the potential downsides," he noted.

Rajan wanred that more negative spillovers could follow as the Chinese economy adjusts to a more sustainable path. Though none of the SAARC nations were commodity exporter to China, they could be affected by the second round effects and similar trade patters with the country, he added.

The financial risks that the China slowdown pose include increased cost of borrowing for SAARC countries taking loans from Chinese banks and capital outflows of the scale seen last year and early this year.

Turning to India, Rajan said, "There is no substitute for good policy."

The cleaning up of the process of allocating public resources like spectrum and mines, as well as the process of appointing critical personnel such as public sector bank chiefs could be one of the most effective reforms undertaken by the government, the RBI Chief said.

"This is significantly increasing transparency in our system," he said.

India is also being careful about foreign borrowing, especially very short term, so as to defend itself from global risks, Rajan said.

"We also are careful in moderating periods of extreme volatility in the currency through exchange intervention," Rajan said.

The central bank is extremely careful not to try and target any particular rate, but lets the market adjust as needed, intervening only when there are excessive movements, he added.

"As a result, despite running a current account deficit, the currency has been relatively stable even in extreme risk-off periods," he said.