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Friday, 15 November 2013 00:00
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Indian Express edit 

RBI must resist the knee-jerk responses it came out with the last time the rupee showed volatility.

With an estimated current account deficit (CAD) of $56 billion this year, down from $88 bn in 2012-13, as RBI governor Raghuram Rajan has pointed out, financing it will be easier than was believed even some months ago. India needs to finance $32 bn less, and in the nine weeks since Rajan took over, $17.5 bn has come in from the swap windows for banks and NRI deposits under the FCNR(B) scheme. Also, since the oil companies are largely back in the forex market, buying dollars — for the past few months, the RBI has been selling them dollars directly against a promise that these would be returned later — the additional pressure this would put on the rupee has already been factored in. What's also true is that the RBI/ finance ministry has been innovative in dealing with bringing in forex, from the swaps for oil companies to those for banks and FCNR(B) — offering to, if need be, settle the swaps with oil companies in rupees is yet another sign of this flexibility.

The jokers in the pack are the US taper and the foreign institutional investors (FII). So far in the financial year, FIIs have withdrawn $4.4 bn — they have $24.3 bn in debt and $142.8 bn in equity markets. Should this rise to $10-15 bn, things could start looking tricky. Based on data available so far, however, financing should be alright, provided FDI flows remain on track and touch $20 bn or thereabouts for the year. In the April to August period, $8.2 bn came in, marginally higher than in the same period last year. The question is, however, whether big FDI will come in the run-up to an election.

Equally importantly, what will the RBI do once the US markets begin to factor in a taper? While some amount — $10-15 bn? — may even be spent in trying to defend the rupee, it is important the RBI not resort to the same knee-jerk responses as the last time the rupee showed volatility. Jacking up the effective interest rate by 3 percentage points threw all markets into a tizzy and, at one point, even looked like it could choke up credit, since banks were suddenly staring at Rs 50,000 crore of mark-to-market losses on their bond holdings. Matters eased as the RBI relaxed mark-to-market rules and tried to unwind the emergency measures that did more harm than good. And when the rupee firmed up, it was only because the dollar had weakened against most currencies. A further fall in the rupee, the flip side is, will give a boost to exports at a time when the global economy is picking up.


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