Even as the rupee slumped to an unprecedented low at 59.93 to almost graze the 60-mark against the greenback on stock and bond market panic following U.S. Federal Reserve chief Ben Bernanke’s revelation on plans to withdraw quantitative easing from this year, the government put up a brave face saying it was ‘not short of instruments’ to tackle the currency slide and the authorities were alert to the situation for actions as and when warranted.
Asserting that India’s economic prospects were solid in the medium-term at a hurriedly-convened press briefing soon after the mayhem on the bourses unfolded and the rupee went on a virtual free fall on fears of the U.S. Fed tapering off bond purchases that year, Dr. Rajan viewed that the markets were ‘overshooting’ as the tapering off programme did not imply unloading of U.S. bonds in the market.
“We have a range of instruments. We can call on them as and when needed. We will not flag them. The Ministry of Finance, RBI [Reserve Bank of India] and SEBI [Securities and Exchange Board of India] are watching developments closely and take action appropriate[ly]. We should not let ourselves to be led by the market into directions we do not want to go…Rupee is not in shambles. We should not be overtly pessimistic ...We do not like volatility. We will take actions when warranted,” he said.
RBI on alert
Dr. Rajan pointed out that the Finance Ministry, the RRBI and SEBI were alert to the situation.
“All options are open to us [to stem the rupee slide]. We have to be very careful in thinking through options,” he said, expressing a view which was also separately articulated by Planning Commission Deputy Chairman Montek Singh Ahluwalia during a Cabinet briefing later during the day.
Mr. Ahluwalia described the rupee depreciation as a ‘temporary phenomenon’ and said: “It’s up to the RBI [to take action]. It has a lot of fire power. It will intervene when it thinks it is necessary.” It is believed that the RBI did and the rupee recovered from 59.93 to the dollar in early trade to about 59.7 during noon.
During his interaction with reporters, Dr. Rajan conceded that the current account deficit (CAD) was large but steps were being taken to rein it in.
“We have a current account deficit which is large, but I believe we are on our way to tapering it ... gold imports are coming off their peaks,” he said, even as he ruled out any knee-jerk reaction to check gold imports as such reactions would not augur well for the overall health of the economy.
In an obvious reference to smuggling of gold if such stringent measures are imposed, Dr. Rajan said “curbs or blanket bans are harmful because they hurt the economy.
“We have to take measured actions rather than knee-jerk reactions ... We are not going to take actions that impinge the medium-term prospects for India.”
While pointing out that steps were being taken to liberalise and further strengthen the capital markets, Dr. Rajan maintained that the long-term objectives would always be kept in mind.
“We will be alert to developments and take actions as necessary, but we will not let it detract us from the longer term goal of putting economic recovery on firm and solid ground,” he said.
The Chief Economic Advisor also sought to allay apprehensions on the rupee exchange rate saying that currencies of all emerging market economies had depreciated. “…there is nothing particularly wrong with the rupee right now ... I believe over time matters will stabilise,” he said.