RESERVE Bank of India (RBI) governor Raghuram Rajan’s confidence the country would have adequate foreign exchange resources to finance the current account deficit (CAD) and his assurance that dollar repayments by oil marketing companies to the central bank could be rolled over and even made in rupees if necessary, saw the Indian rupee recover smartly from intra-day lows of 63.91 to the dollar to 63.32 at close.
“There has been some turmoil in currency markets in the last few days, but I have no doubt that volatility may come down,” Rajan told newspersons, pegging the CAD for FY14 at $56 billion.
Bond markets too were cheered after the governor announced an open market operation for Rs 8,000 crore next Monday; the yield on the benchmark bond came off to 8.92% at close from an intra-day high of 9.15%. Rajan pointed out that although borrowings through the marginal standing facility (MSF) window had fallen, interest rates in the market suggested there was some tightness.
Governor Rajan noted that ‘the majority’ of the OMC demand was now back in the markets, in a process that had begun on October 14. Since August 28, the RBI had been funding these purchases through a special swap window. The market, he pointed out, had absorbed the demand smoothly and had been unaware of the shift until talk from the finance ministry. “If the exchange market is calmer, this additional demand will be easily absorbed. But if not, we could roll over some portion of the swaps so that they mature at a calmer time,” Rajan said. “We can even consider settling in Indian rupees,” added Rajan.
The rupee had slipped sharply on November 7 — the day the ministry remarked on the oil demand — to an intra-day low of $62.76 before closing at 62.40/$. Since then, the weakness has persisted with strong jobs data from the US last Friday heightening fears the US Fed would start tapering its $85-billion monthly bond purchases as early as January.
The RBI governor, however, asserted CAD could be reined in at $56 billion — $32 billion less than in FY13. With $17.5 billion flowing through the FCNR(B) and bank capital swap windows, it should not be difficult, he said, to fund the deficit even assuming there were FII outflows.
“So, if other financing remains the same as last year, which it seems on track for, even if foreign investors pull out significantly more money this year than they have so far, we still can break even on capital flows,” said Rajan.
Between April and now, equity inflows have been close to $6.4 billion while the debt market has seen an outflow of $10.8 billion. In FY13, foreign flows into the debt and equity markets totalled $26 billion.
Foreign investments in rupee bonds – corporate and government – are down to $19 billion from $37 billion on May 21. However, the governor said the remaining investment could be ‘more patient money, but given its diminished size, I do not see its possible exit as a huge risk.” Rajan also told newspersons the government was in discussions with agencies on India becoming a part of global bond indices and was working on comfort levels. “I have no doubt we will be part of an index,” the governor said adding, however, that no timelines had been set. Between June and now, outflows from the bond markets have been $12.6 billion.
Jayesh Mehta, MD and head, fixed income, Bank of America-Merrill Lynch said the governor had cleared much of the doubts and fears of the market. “He has cleared the air substantially. The improvement today after the statement is sustainable,” Mehta said.
The 10-year benchmark bond yield, which had hit a high of 9.15% in intra-day trade cooled down significantly to end at 8.92%. Yields have risen significantly since last week on fears that the RBI would not step in to infuse liquidity via OMOs, which it typically does during busy credit season. Indranil Pan, chief economist at Kotak Mahindra Bank said in a note the press conference was held to soothe the market’s nerves that were showing some strain, especially with the depreciation bias of the USD/INR that registered the day’s weakest at 63.90 and the 10-year yield at the weakest at 9.15%.
The central bank, the governor noted, was as concerned about the weak economy as it was worried about inflation. Factory output, he observed had come in below expectations, but a good monsoon and the resultant pick-up in consumption along with a healthy export growth could push economic growth higher in October-December period, he added. Within consumer inflation, the RBI was comforted by the fall in core consumer price inflation and the fall in the momentum as well. “We will watch the incoming data carefully especially the harvest as well as the second round effect of fuel price increases before we make further decisions,” Rajan said.