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RBI's Rajan Seeks To Calm Rupee Concerns

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India's central bank chief Raghuram Rajan on Wednesday tried to calm investors' fears over the rupee amid concerns of a sooner-than-expected tapering by the U.S. Federal Reserve and pointed out the declining core inflation as well as a narrowing current account gap.

In a hastely convened press conference, the Reserve Bank of India Governor said, "There is no fundamental reason for volatility in the value of the rupee."

He urged investors to "take a deep breath and examine the fundamentals".

"It is important that the RBI clarifies its interpretation of economic events and the likely direction of policies at times of uncertainty so that the market worries about the right things and does not get into a tizzy about the wrong ones," Rajan said.

Asian markets were hit hard this week after stronger-than-expected U.S. jobs numbers rekindled concerns that the Fed may opt to withdraw stimulus earlier than thought.

Citing the latest trade data, Rajan said significant progress has been made in bringing down the current account deficit (CAD) for this year. The bank estimates CAD to be about $56 billion this year, which is 3 percent of GDP and $32 billion less than a year ago.

The RBI estimate was lower than the $60 billion CAD gap forecast by Finance Minister Palaniappan Chidambaram early this month, which was smaller than the government's previous estimate of $70 billion. In fiscal 2013-14, the country's current account gap rose to a record high $88 billion or 4.8 percent of GDP.

The shrinking CAD was partly due to the strong measures adopted to curb gold imports, Rajan said. That said, he expressed worry over gold smuggling. "While we do see a sizeable increase in seizures, we believe gold smuggling has increased from a low base, and is still small," he said.

Further, he said markets' worry over CAD funding amid FII outflows were exaggerated. Even if foreign investors pull out significantly more money this year, the country can still break even on capital flows if other financing options remain on track, the central bank head said. Further, he said the remaining FII funds are "more patient money" and its exit cannot be seen as a huge risk due to diminished size.

Turning to the worries over dollar-demand from the state-run oil marketing companies (OMCs), Rajan said. In August, the RBI opened a facility for these companies to buy dollars directly from the central bank, thereby keeping them away from the exchange market, so as to avoid pressure on a weakening rupee.

Rajan said the OMCs were allowed to enter the market, starting October 14, after the rupee stabilised. He noted that the market absorbed the additional demand for dollars smoothly.

"There has been some turmoil in currency markets in the last few days but I have no doubt that once markets calm down, the remaining demand will be absorbed easily," Rajan said. "We have no intention of rushing this process."

Regarding economic indicators, the RBI chief said yesterday's lower-than-expected industrial production figures were disappointing. However, he hopes to see stronger growth numbers for the second half of the fiscal year, given the strong monsoon, pick-up in consumption, very healthy exports and robust growth in the power sector.

Rajan, a former IMF chief economist, expressed concern over inflation, saying food inflation remained "worryingly high". Data released on Tuesday evening showed that CPI inflation quickened to 10.09 percent in October from 9.84 percent in September.

That said, Rajan said it was comforting to noted that core inflation declined to 8.1 percent from 8.5 percent. "The momentum for core inflation is also on the decline," he added.

"We believe the weak economy, increases in food supply, and recent policy rate hikes will provide a disinflationary impetus over time, and recent data do not dispel this view."

The central bank chief said the bank will watch the incoming data carefully before making further decisions on interest rates. Late October, the RBI lifted interest rates for a second straight month as Rajan stepped up the fight against high inflation. The bank also rolled back some liquidity tightening measures.

Today, Rajan announced that the RBI would under take an open market operation of INR 80 billion given some liquidity tightness in the system. The operation will be carried out on Monday, November 18.

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