Even as Monday’s official statements on the market panic being ‘unwarranted’ failed to stem the free fall, leave alone talk up the rupee, the authorities swung into action on Tuesday to hold the currency at below 59 to the U.S. dollar mark.
The Finance Ministry kept up a bold face and indicated that a slew of measures were in the pipeline to bring about stability in the foreign exchange market, meet the short-term objective of financing the widening current account deficit (CAD) and also the long-term objective of sustainable growth. The Finance Ministry while maintaining that stability would return in the next three to four days, also sought to present an overview on the macro-economic sentiments that were in play in the market.
At a press briefing, Chief Economic Advisor Raghuram G. Rajan indicated that the government would ‘very shortly’ announce and implement a host of measures aimed at stepping up foreign investment inflows to shore up the rupee worth, while the regulator would act at appropriate time — as the RBI did during the day — to halt the slide.
“We will continue to implement measures to ease foreign investor portfolio inflows and some will be done shortly. In the coming weeks, we will be recommending the policies to enhance FDI limits in a number of areas. All this will help not just in the short-term objective of financing CAD but also in the longer term objective of ensuring sustainable growth,” Dr. Rajan said.
Dr. Rajan, while admitting that the rupee depreciation was mainly owing to FII fund outflows from the debt market, pointed out that the net portfolio inflow was still positive. “There has been some volatility in the financial markets in the last few days. The government, the RBI and SEBI are watching the market development, and each one will take action as warranted,” he said. Dr. Rajan also went on to argue that some of the negative factors that had been afflicting the economy were now reversing. For instance, gold imports on the first 13 business days till May 20 averaged $ 135 million a day. However, in the 14 subsequent days till Friday of last week, they averaged only $36 million. With the measures taken by the RBI and the government, he said “I think we should see a significant drop in gold imports for June. I should add that we are not contemplating any additional restrictive measures on gold and there is no reason for speculating on this basis.”
Alongside, with oil prices remaining low and exports picking up, he felt there was good reason to believe that the process of narrowing of CAD would continue over the next few months. “In sum, we should look through the current volatility. The fundamentals for India are improving, even while many parts of the world are still stuck in recessionary conditions,’’ he said.
Earlier in the day, Economic Affairs Secretary Arvind Mayaram maintained that the rupee fall was a temporary phase and a correction mode. “This is a temporary phase. This is simply a correction. Our indication is some of the FIIs are now poised to bring in large funds. In next 3-4 days, we will see a mid-course correction,” he said.
In the coming days, the FIIs, he said, would put in funds into the debt segment, which would help the rupee move up from the current levels. “Certainly we are not happy about it [the rupee slide], but we are certainly not unduly worried about it. There will be a course correction.... Rupee is going to stabilise and we are going to see a positive movement,” Dr. Mayaram said.
