Earlier, the Finance Minister had projected the CAD for the current fiscal at $70 bn, which was revised downwards to $60 bn
“Our estimates now is that CAD this year will be $56 bn, less than 3% of GDP and $32 bn less than last year…. Of course, some of that compression comes of our strong measures to curb gold import” — Raghuram Rajan, Governor, RBI
Mumbai : Seeking to calm currency markets, the Reserve Bank on Thursday said the current account deficit in 2013-14 will be $56 bn – much lower than the quantum projected earlier – and there is no fundamental reason for rupee depreciation.
“Our estimates now is that CAD this year will be $56 bn, less than 3% of GDP and $32 bn less than last year…. Of course, some of that compression comes of our strong measures to curb gold import,” RBI Governor Raghuram Rajan said.
The current account deficit (CAD), which is the difference between outflow and inflow of foreign exchange, touched an all-time high of $88.2 bn or 4.8% of the GDP in 2012-13.
Earlier, the government had projected the CAD in the current fiscal at $70 bn, which was revised downwards to $60 bn by Finance Minister P Chidambaram on back of declining gold imports and recovery in 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”. Continuing its slide for the sixth straight day, the rupee lost 17 paise to trade at a fresh two-month low of 63.88 in early trade on strong dollar demand from importers.
Rajan further said RBI was weighing various options to contain exchange rate volatility and would come out with ‘appropriate’ steps in the future.
RBI to inject Rs.8,000 cr
Rajan also said the central bank would undertake open market operations (OMO) on Monday to inject Rs.8,000 crore into the system to ease the liquidity situation. As part of the OMO, the central bank buys securities from banks and release funds in the process.
Rajan said the interest rates in the market suggested some liquidity tightness, and said the RBI was conscious of the need to keep the system well supplied with liquidity.
“While borrowing from the MSF (Marginal Standing Facility) has come down substantially after the RBI extended the term repo window, market interest rates suggest some liquidity tightness,” he said.
“To alleviate this tightness, we propose to conduct OMOs.”
Rajan’s announcement comes at a time when the government bond yields have risen above the psychologically crucial 9% mark.
After Rajan’s announcement of open market bond purchase, the yield on the 10-year benchmark 7.16%, 2023 bond fell to close at 8.92% against 9.05% Tuesday.
On interest rates, he said, the RBI would take a decision later taking into account various parameters. The RBI is scheduled to announce the next policy review on December 18.
He expressed the hope that inflation would decline in the coming months once the impact of the good harvest was felt on the market. As per the official data, retail inflation measured by movement in the consumer price index (CPI), rose to 10.09%, entering double digits after seven months.
No hurry to shut
Elaborating on exchange rate issues, Rajan said that majority of dollar purchase by oil companies have been shifted to the market. In order to check rupee slide, 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 PSU oil companies are the biggest buyers of dollars, requiring 8-8.5 billion dollars every month for import of an average 7.5 million tonnes of crude oil.
The rupee, it may be mentioned, fell to a record low of 68.85 to the dollar on August 28 and recovered on the optimism that the Fed would delay tapering its bond buying programme.
The public sector oil companies are the biggest buyers of dollars, requiring USD 8-8.5 billion every month to import an average 7.5 million tonnes of crude oil.
Rajan said that as the exchange rate stabilised, the OMCs returned and purchased more dollars from the market, a process that started on October 14.
“Today, a month later, I am glad to report that majority of oil marketing companies’ demand for dollars is back on the market,” Rajan said.
PMEAC Chairman C Rangarajan said, the domestic economy will see ‘distinctly better’ growth in the second half of the current fiscal on improvement in manufacturing and good monsoon this season.
“There has been improvement in the manufacturing sector and in the second half of the current fiscal the growth of this sector could be about 3%”, Rangarajan added. The economy grew by 4.4 per cent in the first (April- June) quarter of current fiscal. In 2012-13, the GDP growth fell to a decade low of 5 per cent.