Millennium Post

RBI can’t arrest rupee’s downward trend

The Reserve Bank of India (RBI) cannot arrest the rupee’s decline if it is caused by weak fundamentals or global factors but can only take more calibrated steps in the forex market in such a scenario, top official said on Friday.

‘If the rupee fall is due to fundamental weakness of the economy, or due to global factors, then the RBI cannot support it,’ RBI deputy governor K C Chakrabarty said. The government must address trade deficit issues if the fall of the rupee is due to weak fundamentals, he added. ‘If the rupee is depreciating due to real sector issues, financial sector measures will not solve it,’ Chakrabarty said.

The rupee has been losing value against all the major currencies, especially the American dollar, since April and hit an all-time low of 56.52 on Thursday. It has shed nearly 24 per cent year-to-date.

As a measure to contain dollar demand and help support the rupee, Chakrabarty also hinted at opening a separate window for oil companies.

‘The option [of opening a separate dollar window for oil companies] is open. Whether [RBI] is doing it or not, I don’t know, because it will not be done in the public view,’ he said.

As the rupee loses ground almost everyday against the US dollar, with the hands of RBI are tied in view of depleting forex reserves, there have been talks of directly selling dollars to oil companies - the biggest consumers of the greenback - by opening a separate window for them.

The move can take off the demand pressure from the open market for the dollar.

Oil has been the biggest component of the country’s import bill for decades. In FY’12, out of the total import bill of $488.6 billion, as much as $155.6 billion was on account of oil as India meets 70 per cent of its fossil fuel needs through imports.

This has widened the current account deficit to over 4 per cent last fiscal, as against 2.6 per cent in 2010-11. Also, fiscal deficit shot up last fiscal hitting 5.76 per cent of the GDP, from a projection 4.6 per cent.

Economists have been blaming these factors for the plight of the rupee, apart from fall in investments, which came down to 30 per cent in FY’12 from 38 per cent in FY’08.

Without referring to the forthcoming mid-quarter review of the monetary policy slated for June 18, the RBI Deputy Governor said, ‘If inflation comes down then interest rate will also come down.’

On the highly disappointing GDP numbers, he said it does not matter if it is 6.5 or 7 per cent, if we take corrective measures. Unless we work hard, GDP will fall further.
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