Better placed to face Fed taper: Rajan

Published: 14th November 2013 06:00 AM  |   Last Updated: 14th November 2013 01:27 AM   |  A+A-

Reserve Bank Governor Raghuram Rajan sought to allay fears that a sooner-than-expected tapering of debt by the United States would cause the rupee to weaken further.

In an emergency press meet called on Wednesday, Rajan said, “There is no fundamental reason for volatility in the rupee… in such times it makes sense to take a deep breath and examine fundamentals.”

He pointed out to improving trade data and said that the current account deficit (CAD), the single largest cause for the fall in the rupee will be $56 billion, or less than 3 per cent of India’s GDP for the current fiscal. In the last fiscal year, this number stood at $88 billion.

Forex dealers said that the rupee that had hit a nine-week low earlier on Wednesday closed higher at Rs 63.30 per dollar.

“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.

The RBI has allowed state-run oil companies to start purchasing dollars from the markets. It will, however, not rush the process of tapering its dollars swap window to these companies.

Rajan said that most of the dollar demand from the oil marketing companies is back in the market and there has been no unusual stress in the exchange rate. “Most of the demand by oil-marketing companies is back in the market and participants did not even know that,” he added.

While the  RBI will choose the most appropriate solution to settling the dollar swaps with oil companies, Rajan said that it was possible to roll over some portion of the oil company dollar swaps if market conditions are not stable. The RBI had given oil marketing companies a special dollar swap window to borrow dollars. This measure was aimed at defending the rupee as it plunged to a record low in late August.

Commenting on the IIP numbers, Rajan said that they were below expectations and reflected a volatile capital goods sector. He said that the silver lining lay in good monsoons and a recovery in exports.

Rajan also expressed worry on the inflation number and said that the central bank was concerned about it along with the weak economy. The slowing of core inflation is good but the worryingly high food inflation is a major concern for RBI, he said.

He also said RBI was weighing various options to contain exchange rate volatility.


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