Rate hike by US Fed will benefit the world, says Raghuram Rajan

Reserve Bank of India (RBI) governor Raghuram Rajan has said that there would be some volatility in emerging markets once the US Federal Reserve decides to raise interest rates, but that strong growth in the United States is good for the world economy.

"If the Fed starts raising interest rates, as I presume they will... It will be good for the rest of the world. The rest of the world will benefit from US growth," Rajan said at an event on the sidelines of the International Monetary Fund (IMF) and World Bank fall meetings in Washington on Saturday.

"It could create some volatility for the emerging markets... My hope is that after the initial volatility, there will be differentiation, and the financial investors would try to see where there is some macrostability... And I hope India comes out in (that) group," the RBI governor said.

Rajan added that a Fed rate hike would create currency volatility and, given differences in dollar and euro interest rates, would raise a question for India: "Do we go closer to the dollar, do we go close to the euro?"

"There will be some adjustments that would need to be made on that basis. It will have effects on the direction of trade somewhat," Rajan said.

The RBI governor also said the rupee is not overvalued at this point in time and that the Indian economy is in the "beginning phases of a recovery which I hope will strengthen over time".

"My guess is that this quarter will be a little weaker than the previous quarter, but I think that over the course of this year, we will be solidly in the five-per cent growth range and by next year we will be solidly in the six-per cent growth range," he said.

Rajan said that a trajectory - or 'glide path' - the central bank had laid out for lower inflation has wide acceptance in financial markets even if it has not yet been enshrined in law. "For now, I have what I need, which is a glidepath which has... Convinced the financial markets that we mean what we say."

The RBI has set a target of bringing inflation down to eight per cent by January 2015 and six per cent by January 2016 but Rajan has admitted to upside risks to the latter target.