There is no fundamental reason for rupee volatility, says Raghuram Rajan

In an attempt to talk up the markets, the Reserve Bank of India (RBI) Governor Raghuram Rajan, on Wednesday, said that the current account deficit (CAD) for this year would be about $56 billion, less than 3 per cent of gross domestic product (GDP) and $32 billion less than last year. He felt that there was no fundamental reason for rupee volatility.

“I am especially happy about the 13.5 per cent increase in dollar exports since last October, the reduction in imports by 14.5 per cent and dramatic reduction in the trade deficit by 48 per cent,” said Dr. Rajan, while addressing a hurriedly-convened press conference here.

The rupee, which was on the downhill path in the last few days, touched a low of 63.90 a dollar intra-day on Wednesday. The rupee, which touched a historical low of 68.85 at end-August, later recovered to 61-62 levels before the current fall.

There has been some turmoil in financial markets across the world as fears of a sooner-than-anticipated U.S. Federal Reserve tapering have grown. In India, Dr. Rajan said “we have had added volatility as the market has become concerned about policy rates and about oil marketing companies demand for dollars.”

“There are issues we have to worry about and there are issues we should not be so concerned about,” he added.

On fears of an FII (foreign institutional investor) withdrawal from the capital market, Dr. Rajan said that “even if foreign investors pull out significantly more money this year than they have so far, we still can break-even on capital flows.” He said that "till yesterday [Tuesday], we raised $18 billion of money through new channels.”

The RBI Governor said that there was no immediate worry on the dollar demand from oil marketing companies (OMCs). The RBI sold dollars directly to OMCs starting from August 28, 2013, ensuring that they did not enter the exchange market directly. However, the apex bank allowed them to return to the market, starting October 14. “Today…..majority of oil marketing company demand for dollars is back on market. The market absorbed the additional demand quite smoothly — in fact, participants did not even know it was back until some talk from the Finance Ministry last week,” he added. There had been some turmoil in currency markets in the last few days but “I have no doubt that once markets calm down, the remaining demand (of OMCs) will be absorbed easily. We have no intention of rushing this process,” he added.

Growth numbers

On the domestic market, he said that good monsoon and the associated pick-up in consumption, the very healthy exports, and the strong growth in the power sector should lead to stronger growth numbers for the second-half of the fiscal year.

Turning to inflation, Dr. Rajan said food inflation was still worryingly high, and the effects of the harvest were still awaited. But looking through the headline numbers, “I am somewhat more heartened by the outcome of core Consumer Price Index (CPI) inflation, which declined to 8.1 per cent from 8.5 per cent in September. The momentum for core inflation is also on the decline.”

The Governor said that the RBI was conscious of the need to keep the system adequately supplied with liquidity, as indicated in its policy statement recently, so that productive sectors were well supplied with credit.

He added: “While borrowing from the MSF (marginal standing facility) has come down substantially after the RBI extended the term repo window, market interest rates suggest some liquidity tightness. To alleviate this tightness, we propose to conduct open market operations on November 18 for Rs.8,000 crore”.

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