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RBI chief reassures as oil price hike highlights India risks

Mumbai Reuters: India is ready to deal with any external shock arising from the Iraq crisis, the Reserve Bank of India (RBI) chief said on Tuesday, even as a spike in oil prices heightens the inflation, growth and budget risks facing new Prime Minister Narendra Modi.

Modi capitalised on popular anger over low growth and high inflation to claim India’s biggest election victory in three decades last month, but it is those same troubles that now pose his first big economic test.

RBI Governor Raghuram Rajan reassured markets that India was better prepared to deal with external shocks than last year.

“As far as the external front goes, we are in a much better position than we were last year,” Rajan said on the sidelines of an industry event in the financial capital Mumbai.

“We have sufficient reserves, the current account deficit is low. So I think one shouldn’t worry too much about the external side at this point,” Rajan said.

The rupee sank to 60.55 to a dollar on Tuesday, its lowest since April 29, on rising crude prices and increasing geopolitical tensions centred on Iraq.

Brent crude futures have risen by around $3 over the past week, during which Islamic militants have taken control of tracts of northern Iraq.

The United States is considering whether to launch air strikes and hold talks with former arch-enemy Iran to bolster the Baghdad government.

The RBI’s dollar reserves rose to $314 billion as of May 9, the highest since November 2011 as the central bank bolstered its ability to defend the rupee, before falling to $313 billion as of June 6.

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