RBI pegs CAD at USD 56 billion; Rupee recovers after Raghuram Rajan's pep talk

Mumbai: Seeking to reassure investors, RBI Governor Raghuram Rajan 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 per cent 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 per cent 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" 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 Tuesday, 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.