What we need to do is put our house in order before it (tapering) comes back, says the RBI Governor

Reserve Bank Governor Raghuram Rajan on Friday exuded confidence that the country will be able to finance the current account deficit (CAD) without drawing down much from the Forex reserves.

“We are fairly confident that we can finance this year’s CAD without a substantial draw down in the reserves,” Dr. Rajan told reporters after his first monetary policy review.

“The Finance Minister’s math, which the RBI collaborated, suggests CAD could come down to USD 70 billion or even below that. The financial measures we put in place should rise more than that amount of money,” Dr. Rajan said.

CAD, a measure of the flow of goods, services and money across national borders, stood at a historic high of 4.8 per cent, or $88 billion, of the GDP last fiscal. The Finance Minister has set a target of 3.7 per cent CAD, or $70 billion, this fiscal.

Basing his optimism to the increased dollar inflows, Dr. Rajan said, “I am glad to say banks have started bringing in money. Till yesterday, we had received $466 million through FCNR-B and $917 million through swap facility to a total of nearly $1.4 billion.”

Dr. Rajan has unveiled a slew of rupee-supporting measures since taking charge on September 4.

In his first monetary policy review, the Governor unexpectedly increased the repo rate by 25 basis points to 7.50 per cent. He also reduced the marginal standing facility rate by 0.75 per cent to 9.5 per cent, thereby lowering the cost for funding for banks.

The central bank also reduced the minimum daily maintenance of the cash reserve ratio (CRR) from 99 per cent of the requirement to 95 per cent effective from the fortnight beginning September 21.

On September 4, Dr. Rajan announced a string of steps such as offering a special window to swap foreign currency non-resident (FCNR) deposits and enhancing limits for exporters to re-book cancelled forward exchange contracts. The measures helped the rupee rally 9 per cent versus dollar from 67.63 (September 3) to 61.77 (September 19).

About the US Fed’s decision to delay tapering, Dr. Rajan said it is just a postponement and the RBI is well prepared to deal with it whenever the wind down begins.

“We are prepared for tapering. We have announced various measures and they will play out, and that to some extent offset any potential for outflows down the lines.”

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