With the rupee continuing its free fall, the Reserve Bank of India, on Thursday, indicated that it might sell dollars directly to oil companies to ease pressure on the currency.

RBI Governor D. Subbarao, in his interaction with media after the board meeting, also hinted at the possibility of issuance of overseas sovereign bonds to deal with the balance of payment situation.

“The RBI will do whatever is necessary. Some structural changes are necessary for improvement in current account. Meanwhile, the RBI is monitoring the situation and we will do whatever is necessary, consistent with our policy,” he said.

Direct sale of foreign exchange to oil marketing companies, Dr. Subbarao said, “has been an issue on the table. I am not ruling it out. I am also not saying that we are going to do it right know. It's an open issue. We have done it in the past. At the moment, we have not done it so far.”

Several experts, including C. Rangarajan, Chairman of the Prime Minister's Economic Advisory Council (PMEAC), have suggested that he RBI should consider selling foreign currency to oil companies as they withdraw huge amounts to buy crude in the international market.

As regards the sovereign bonds, the RBI chief said, “I cannot say in favour or out of favour. We have done it in the past, it might be done in the future... but it's not something that is being contemplated right now.”

India in the past had raised funds from overseas markets from issues such as the Resurgent India Bonds to tide over the balance of payment problems.

After losing ground three days in a row, the rupee, on Thursday, touched its lifetime low of 56.38 to a dollar but recovered to close at 55.65 after Dr. Subbarao's press conference.

Since March 1, the rupee has lost over 13 per cent and 11 per cent since the presentation of the budget on March 16 in the face of withdrawal of funds by foreign investors from stock markets. The budget contained proposals such as retrospective taxation and general anti-avoidance rules (GAAR), which impacted foreign portfolio investment. Pointing out that the rupee had been depreciating over the last 3-4 months, Dr. Subbarao said, “the RBI is continuously monitoring the situation. We have taken action through current account flows, encouraged inflows and also (steps) to curb speculation.''

The movement of the rupee, Dr. Subbarao said “is a function of external situation as well as development in current account and capital account and balance of payments.''

Replying questions on the price situation, Dr. Subbarao said the deterioration in inflation had been mainly on account of rise in prices of food items. “We noted that inflation has been a surprise upside for April. We also noted that increase has been on account of food inflation,” Dr. Subbarao said, adding that the central bank would take into account recent developments while announcing its mid-quarterly policy review on June 18.

Inflation, represented by the wholesale price index, rose to 7.23 per cent in April from 6.89 per cent in the previous month, while retail price inflation (CPI) entered double digits of 10.36 per cent in April (9.38 per cent in March).

“Core inflation, which is non-food manufacturing (items), has remained below 5 per cent. So in our next mid-quarterly review, we will take into account the numbers which have come after our mid-April statement. We will consider how the inflation scenario has evolved. We will take into account the growth statistics and take a decision,” Dr. Subbarao said.

Pitching for reduction of fiscal deficit, Dr. Subbarao said, it was necessary to contain inflation.

“Our views are quite well known on fiscal deficit. We have said that fiscal consolidation is important and very necessary for inflation to come down. So we have said that in our annual policy statement last month that the government must deliver on the budgeted fiscal deficit target,” he said.

Because of various global and domestic factors, the fiscal deficit of the Central Government during 2011-12 soared to 5.9 per cent of the Gross Domestic Product (GDP) as against the target of 4.6 per cent. The government proposes to bring it down to 5.1 per cent of GDP in 2012-13.

The current account deficit, which is the difference between inflows and outflows of foreign exchange, rose to 4 per cent of GDP at the end of December, 2011, as against 3.3 per cent during 2010-11.

On the volatility in stock markets, Dr. Subbarao said, “the RBI does not follow the stock market. We look at the stock market for understanding the macro-economic situation, but I cannot comment on stock market movements.”

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