‘Unwarranted panic in the rupee market in the recent past’
Moneylife Digital Team 20 September 2013

India can fund the current year’s CAD without substantially drawing upon the country’s forex reserves, said Dr Raghuram Rajan, governor, Reserve Bank of India in his press meet

Dr Raghuram Rajan, governor, Reserve Bank of India declared that there was unwarranted panic in the rupee market in the recent past, when the US dollar was valued at close to Rs70. There is no need to panic today, as the oil prices are not going to shoot up in US dollar terms, while the Syrian crisis seems to be under control.

 

While the current account deficit (CAD) of India is a cause for concern, India can fund the current year’s CAD without substantially drawing upon the country’s forex reserves, pointed out Dr Rajan in his press meet. He felt that the inflationary pressures were mostly due to higher oil prices and rupee depreciation, and the fear of the high fiscal deficit was being tackled by the Finance Minister.

 

The country has breathing room to put its economy in order, as the Federal Reserve has postponed its plans to taper down the asset purchases. The emerging markets will still be flush with dollars to buy on the part of foreign institutional investors. The Reserve Bank will be ready with the economy in better shape, argued Dr Rajan, when the Fed does decide to taper down asset purchases in a phased manner.

 

In order to encourage market players, the Dr Rajan said that there was no intent to impose additional capital controls in the forex market. Even the OMC (oil marketing companies) forex window will not be permanent and will be tapered down once the economy improves. RBI will be happy to liberalise once the inflows resume, assured Dr Rajan.

 

Dr Rajan also observed that the market was still in a wait-mode as it anticipates some harsh measures from the government on fuel subsidies, especially diesel. This will be known shortly.

 

On the common man’s concerns, Dr Rajan said that the kharif crop harvest was expected to be good and that once the rural sentiment improved, the demand-side concerns in the economy would recede. Inflationary pressures would improve over a 6-month horizon.

 

Dr Rajan hastened to point out that the repo rate hike by 25 bps was not only to control inflation. “This is the course that we have to take to stabilise the economy. We must balance the state of the economy against the fight against inflation,” he insisted. The cut in marginal standing facility (MSF) to 9.5% was there to promote growth.

 

Dr Rajan pointed out that there were talks to ensure India has a place in the global bond market map. Also, he said that the FII (foreign institutional investors) gilt investments limits were yet to be breached. After a knee-jerk reaction to the repo rate, the stock market recovered substantially.

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