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