India: RBI Governor sees "no fundamental reason" for rupee volatility
November 13, 2013
Reserve Bank of India (RBI) Governor Raghuram Rajan issued an unscheduled press release on 13 November in order to clarify the Bank's position and strategy concerning recent developments in the value of the Indian rupee (INR). The statement was released the day after the rupee hit a two-month low of 63.72 INR per USD. The currency has experienced strong volatility in recent months following the historic low of 68.88 INR per USD recorded on 28 August.
In the statement, Rajan stressed that the recent volatility has no support from economic fundamentals, neither from the external sector nor from the domestic side of the economy. The current account deficit - the fundamental cause of the rupee's depreciation - will be, "about USD 56 billion, less than 3% of GDP and USD 32 billion less than last year." Rajan also stressed that the Ministry of Finance has implemented, "strong measures to curb gold imports," as increasing demand for imported gold has been reinforcing the depreciation of the rupee. Since mid-August, the Ministry has raised import duties multiple times, restricted imports and banned credit card purchases of gold, among other measures. Regarding the domestic market, Rajan said that despite the fact that, "food inflation is still worryingly high," the core-CPI figures point to a fundamental moderation in inflation; CPI declined from 8.5% in September to 8.1% in October. Investment yields in rupees are expected to become more predictable and stable thanks to a progressing slow-down in inflation, which will contribute to the appreciation the rupee.
The RBI also addressed the liquidity of the foreign exchange market and its impact on the value of the rupee. Indian oil marketing companies (OMC) faced liquidity shortages recently as they require dollars for trading purposes and the weaker rupee made it costly to obtain dollars on the market. In order to mitigate the issue, the RBI has been providing OMCs with special dollar liquidity.
Rajan addressed the OMCs' concerns, claiming that the market has absorbed their additional demand for dollars, "quite smoothly." Moreover, Rajan announced in the statement that the RBI will conduct open market operations for the value of INR 8,000 crore (USD 1.3 billion) on 18 November in order to, "keep the system adequately supplied with liquidity."
FocusEconomics Forecast panelists see the INR at 63.4 USD at the close of fiscal year 2012/2013 and at 62.8 at the end of fiscal year 2013/2014.
Author: Ricardo Aceves, Senior Economist