Given how forward markets are looking at a rupee-dollar level of 65.6 in another three months, it’s not certain whether they will be reassured by RBI Governor Rajan’s call for calm yesterday. Even so, he made important points. One, with the bulk of oil demand for dollars back in the market, the pressure on the rupee was likely to ease. Two, while the market was looking at the possibility of dollar demand rising once oil companies had to redeem their swaps—sometime next year—Rajan said that, in the worst case scenario, RBI and oil companies could settle the difference in rupees, so there would be no additional dollar demand from the oil companies other than their normal one. As in the case of the swaps for banks, oil companies and FCNR deposits, RBI has been impressively innovative. Three, if the current account deficit is $56 billion, even if there are large FII outflows, the CAD is financeable—Rajan said he had assumed a complete reversal of FY13 FII inflows while doing his maths. This is over-stating it, but as our page 1 graphic suggests, at worst India would draw down reserves by a few billion dollars.
The other interesting point Governor Rajan made, possibly in response to fears that, with the CPI rising, another rate hike was on the cards, was that RBI would look at all data before taking its next rate call and that, so far, the data on growth was not encouraging. The fact that RBI announced it would do OMOs next week also suggests it is worried about yields shooting up beyond 9%. That’s reassuring.