RBI pegs CAD at $56 bn, says no reason for rupee decline

Mumbai: Seeking to reassure investors, RBI Governor Raghuram Rajan Wednesday said there is no fundamental reason for rupee to fall again, and pegged the current account deficit for 2013-14 at USD 56 billion, much lower than the quantum estimated earlier.

He also said the Reserve Bank will not rush to close the special window opened for dollar purchase by oil companies.

The Governor also expressed the optimism that the second half of the current financial year will see better growth numbers on the back of good monsoon and the associated pick-up in consumption and healthy exports.

Referring to the recent decline in the value of rupee, the RBI chief said: "There is no fundamental reason for volatility in the exchange rate."

"At some time, it makes sense to take a deep breath and examine the fundamentals. I hope you all will do that," he said in the hurriedly called press meet.

Pegging a much lower CAD for the fiscal, Rajan said: "Our estimate now is that CAD this year will be USD 56 billion, less than 3 percent of GDP and USD 32 billion less than last year. Of course, some of that compression comes of our strong measures to curb gold import."

The current account deficit (CAD), which is the difference between outflow and inflow of foreign exchange, touched an all-time high of USD 88.2 billion or 4.8 percent of the GDP in 2012-13.

Earlier, the government had projected the CAD in the current fiscal at USD 70 billion, which was revised downwards to USD 60 billion by Finance Minister P Chidambaram on back of declining gold imports and recovery in exports.

"It's important that RBI clarifies interpretation of economic events and the likely direction of economic policies at times of uncertainty so that the market worries about the right things and does not get into a tizzy about the wrong ones. That is my quote today," Rajan said.

His remarks seemed to have calmed currency markets as the rupee gained 41 paise against dollar to close at 63.30, after declining in the previous five days in a row.

"We have no intention of rushing this process (of closing the special window for OMCs)," Rajan said.

The Reserve Bank in August had opened a special window to help the three state-owned oil marketing companies -- IOC, HPCL and BPCL -- to meet daily foreign exchange requirements and buy dollars directly from RBI.

The rupee, it may be mentioned, fell to a record low of 68.85 to the dollar on August 28.

Rajan said since October 14 most of dollar demand from oil marketing companies has been met from the market only.

The PSU oil companies are the biggest buyers of dollars, requiring USD 8-8.5 billion every month for import of an average 7.5 million tonne crude oil.

Expressing comfort at declining core inflation,narrowing CAD and better growth prospects in the second half on good monsoon, Rajan sought to reassure investors who fear India will be hit again as and when the US ends easy money policy.

Ruling out any major threat from the external front to rupee as well as the economy, Rajan said even if there is no more fresh FII inflows this year, there will not a problem to finance CAD as he country will have USD 32 billion less of CAD to finance this year.

"Last year FII inflows, both debt and equity, accounted for USD 26 billion. Let me assume that we get no inflow this year, and in fact outflows equal the inflows we got last year. In other words, there is a USD 52-billion turnaround in FII flows," the Governor said.

"Remember though that we have USD 32 billion dollars less of CAD to finance this year, and till yesterday, we raised USD 18 billion through new swap channels. So, if other financing remains the same as last year, which it seems on track, even if foreign investors pull out significantly more money this year than they have so far, we still can break even on capital flows," Rajan said.

Noting that OMCs have entered a swap arrangement whereby they will have to repay dollars to the RBI on various dates from February 2014 till April 2014, Rajan said: "One worry expressed by market participants is whether OMCs will add to further downward pressure on the rupee when it comes time for them to repay dollars to the RBI."

"This to my mind is a non-issue because we have three ways of managing the repayment. One is, of course, for the OMCs to buy dollars in the market. If exchange markets are calmer, this additional demand should be absorbed," he added.

Rajan said, "But if they are not calmer, we could roll over some portion of the swaps so they mature at a calmer time. But perhaps the easiest option would be for us to settle the swap with the OMCs by making net payments in rupees, and avoid the need for them to go back to the market for dollars. When the time comes, we will choose the most appropriate combination".

He also announced a bond purchase worth Rs 8,000 crore next Monday to inject liquidity in markets.

He further said the major outflows in the recent past following the tapering talks were debt outflows.

"Though that money has not come back, indeed our FII debt exposure, both corporate and sovereign, has come down from USD 37 billion on May 21 to USD 19 billion today. I presume what is left is more patient money, but given its diminished size, I do not see it is possible exit as a huge risk," the governor said.

Rajan's address came after stronger-than-expected US jobs data last week had sparked concerns about an early end to the Federal Reserve's stimulus, hitting the rupee and sending domestic bonds and shares tumbling. This led to FIIs pulling out more than USD 13 billion from bonds and over USD 2 billion from equities between end May and early September.

Though he termed food inflation "worryingly high", which rose to 10.09 percent in October, Rajan said he was comforted by a downward trend in the core consumer price index, which declined from 8.5 percent to 8.1 percent in the month.

"I am somewhat more heartened by the outcome of core CPI inflation, which declined to 8.1 percent from 8.5 percent in September. The momentum for core inflation is also on the decline," Rajan said.

Top bankers hail work of outgoing RBI Governor D.Subbarao

RBI Governor D Subbarao demits office on September 4, after being at the helm for five years that saw the beginning of the global recession from which it is yet to recover.

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Mumbai, Sept 2:  

Top bankers have hailed the contributions of the outgoing Reserve Bank Governor Duvuuri Subbarao saying he did his best during a tenure that was marked by difficult times for the economy.

“I think the Governor’s (five year) term has been in one of the most difficult environments globally and domestically.

“If you look at the world and our country today, there is so much change that you have to be at your feet and I can’t imagine anybody else doing a better job (than Subbarao),” Axis Bank Managing Director and Chief Executive Shikha Sharma said.

Subbarao demits office on September 4, after being at the helm for five years that saw the beginning of the global recession from which it is yet to recover.

Within a fortnight of him assuming office, global investment bank Lehman Brothers filed for bankruptcy and the hit pulled the global banking system down to an unprecedented credit crisis which eventually led to the worst recession since the Great Depression.

This was followed by a difficult period which saw RBI working in close coordination with the government and other financial sector regulators, as also other central banks, to ring-fence the economy.

While the fiscal and monetary stimuli ensured that the economy did not fall off cliff, this soon gave way to a spike in inflation. This saw rise in policy rates from October 2010 for a year or so even as growth started coming down.

As Subbarao’s term moved close to ending, worries over slowing growth and stubborn inflation complicated the matter for the central bank. His problems got compounded with the fall of the rupee beginning May-end. It declined to a low of 68.85 intra-day to the dollar early last week.

“I’ve the highest respect for him. He has been through difficult times and let’s put it this way: in hindsight, it’s very easy to judge anybody...I do believe he did a great job,” Aditya Puri, who heads the second largest private lender HDFC Bank, said.

“One thing that has not been fully talked about during his tenure is that he has reduced CRR and SLR by 4 percentage points, which to my mind, in a tenure of five years is very significant,” said Pratip Chaudhuri, the chairman of the country’s largest bank State Bank of India.

Chaudhuri, who favoured doing away with CRR, added that its reduction was one of the reasons for the economic buoyancy during early part of Subbarao’s stint.

“To some extent, the buoyancy which we saw in the economy in the previous two years, could be attributed to that,” Chaudhuri said