Union Finance Minister P. Chidambaram on Tuesday asserted that measures taken by Reserve Bank of India (RBI) were only short-term and had nothing to do with the monetary policy review on July 30 and that they would not impact the interest rates of banks.
On the continued decline in rupee value, he said the rupee would find its own market value and the measures announced by RBI on Monday evening were aimed at checking excessive volatility and speculation in the forex market. “These measures should not be read as prelude to any policy rate changes. This has nothing to do with upcoming policy review of RBI. I don’t expect banks to increase interest rates as a result of yesterday’s [Monday’s] measures.”
The measures included raising the cost of borrowing by banks by 2 percentage points to 10.25 per cent and selling bonds worth Rs.12,000 crore through open market operations to suck liquidity to check rupee slide, which earlier in the month touched an all-time low of 61.21 to a dollar.
Mr. Chidambaram said the measures were taken to curb excessive speculation and reduce volatility and stabilise the rupee. “The value of rupee will depend upon how much foreign exchange we earn and how much foreign exchange we spend.”
The Minister admitted that there would be some depreciation in the value of rupee in view of high current account deficit and inflation. The value of rupee would be market-determined and it would find its price.
Mr. Chidambaram ruled out the possibility of banning gold import. He appealed to people to reduce the consumption of the precious metal, which was costing the nation $50 billion in foreign exchange.
Separately, Deputy Chairman of the Planning Commission Montek Singh Ahluwalia said an economic rebound could be expected and these were short-term measures by RBI. Market analysts were not surprised at what RBI had done. “The short-term measures are necessary for growth, and will not make a significant difference to the long-term rates. I would hope that when stability is restored, RBI will be able to wind out this intervention,” he said.