Good policy essential to India's stability: Rajan

He also said India has in place a four-pronged defence against external shocks -- "good policies; prudent capital flow management and swap arrangements; preventing extreme forex volatility; and building reasonable forex reserves." 

"Good policy has been essential to our stability," Rajan said while listing out various structural reforms undertaken by the government to enhance growth.

"RBI has been moderating periods of extreme volatility in the currency through exchange intervention, though only when the movement is excessive, and increasing access to foreign exchange reserves, including pooling of reserves," he said.

In his inaugural speech at the SAARCFINANCE Governors' Symposium held here today, Rajan also said that India's SAARC swap arrangement with a number of SAARC countries had been drawn on by some to alleviate short term foreign exchange needs, and had hopefully been helpful, the Governor averred.

SAARCFINANCE is a "network of central bank governors and finance secretaries of the SAARC region". The South Asian Association for Regional Cooperation (SAARC) was set up as a regional bloc in 1985.

Rajan said sharp slowdown of the Chinese economy remains a significant risk for global economy and the SAARC region.

"The sharp contraction in China's imports over the past year, for instance, had already led to spillovers through the trade, confidence, tourism and remittance channels and SAARC nations had not been able to avert its impact. More negative externalities could follow as Chinese economy adjusted to a more sustainable path.

"Further, China already suffered from the twin-ailment of overcapacity and high leverage. Bad loans in the banking system were likely to grow over current levels and in addition there might be serious weaknesses in the shadow banking system, which could feed back to banks.

"Both could be significant downside risks as they could have second round effects for SAARC economies. Chinese growth would depend not just on its policies, but also on growth elsewhere in the world," he said.

On domestic front, Rajan also talked about steps towards fiscal consolidation to reduce the fiscal deficit, containing inflation through a combination of better food management, and a new inflation framework and calibrated monetary policies.

Rajan said India has also embarked "on a cleanup of bad debts in the banking system so as to free bank balance sheets to support growth are elements of what we have practised in the wake of global uncertainties".

The comments come on a day when the Modi government completes two years in office and amid a debate on whether Rajan should be given a second term after his current three-year tenure ends this September.