Kolkata: The Reserve Bank of India (RBI) is prepared for an almost certain interest rate hike by the US Federal Reserve next week and the volatility it may trigger in financial markets, governor Raghuram Rajan said on Friday.

Rajan told reporters after a board meeting in Kolkata that the Fed may raise rates by up to 25 basis points. A basis point is one-hundredth of a percentage point.

There is a 70-75% chance that the Fed will raise interest rates next week, he said.

The Fed will meet on 15-16 December to decide on its future course of action. Most now expect it to hike rates for the first time in nearly a decade.

RBI is prepared for any volatility in markets that this rate hike may trigger, according to Rajan and deputy governor Urjit Patel. It will cause some changes in financial flows, but the anticipated hike has been factored in by the markets, said Patel.

“One cannot be completely confident, but we are prepared for any eventuality," Rajan added.

The best defence against external shocks and volatility is “sensible and sustainable" domestic policies for growth, Rajan said.

In September, the World Bank warned that monetary policy tightening by the Federal Reserve could usher in a “perfect storm" of threats to growth and financial stability in developing economies. Capital flows to developing economies could cease, it said.

RBI said on Wednesday that it will step into the exchange-traded currency derivatives segment of the foreign exchange market, if required. The move was seen as a way to ensure RBI can manage any undue volatility that emerges in the currency.

The disclosure is the first such by RBI, which has already been intervening in the spot currency market and the over-the-counter cash and derivatives segments.

On 4 December, the rupee hit a 27-month low of 67.01 to a dollar due to outflows from local equity markets. On Friday, the currency closed at 66.90 per dollar. Since the beginning of this year, the rupee has lost 5.76% against the dollar. Since the start of December, the rupee has lost 0.34%, but could have fallen more if the central bank had not intervened in the market. According to traders, RBI has been selling dollars through state-owned banks to slow the slide of the Indian currency.

Foreign institutional investors (FIIs) have been selling in the equity markets. They have been sellers in 24 of the last 26 trading sessions. Since 30 October, they have sold a net of $1.8 billion, data from Bloomberg shows. Selling by FIIs has pulled down BSE’s benchmark Sensex by 4% since the start of December.

Rajan used the occasion to speak about stressed assets burdening the banking system. He said the banking regulator has in the past year created a “variety of powers" for banks to deal with non-performing assets (NPAs).

The aim was to empower banks to recover loans and not to defer NPA recognition, Rajan clarified, adding that RBI had started to evaluate how these tools are being used by banks to deal with stressed assets.

For 39 listed banks, gross NPAs rose 26.87% to ₹ 3.4 trillion in the quarter ended September 2015 from ₹ 2.68 trillion a year ago. Many corporate borrowers have been unable to repay loans because of stalled projects and slower economic growth in recent years.

Top officials at RBI, including Rajan, are to meet with bank chiefs on Monday to assess the progress and implementation of recently introduced stressed-asset management schemes.

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