Indian economy ready for US Fed taper: Rajan
31 Dec 2013 6:23 AM IST
‘External sector risks have been considerably reduced and the effect of the tapering on the economy is expected to be limited and short-lived,’ the report released on Monday said. Delay in the tapering of the $85 billion-a-month bond buyback programme by the US Fed (tapering will start from 1 January) gave the country time to replenish the forex reserves and rein in the high current account gap.
In the third week of December, the US Fed announced that it would cut back bond buying by $10 billion a month to $75 billion from January on the back of improvement in the world's biggest economy.
‘The CAD is expected to be less than 3 per cent of the GDP during the current financial year,’ the RBI said in the half-yearly report. ‘On balance, the country's external position appears to be manageable and reserves seem adequate.’
CAD shot up to an all-time high of 4.8 per cent last year on account of a heavy trade deficit and higher gold imports. The high CAD, along with fears of tapering, was one of the reasons for the rupee touching a lifetime low of 68.85 against the dollar on 28 August this year. The rupee improved since then, but is still 14 per cent lower year-to-date.
The authorities acted on multiple fronts, curbing gold imports, opening currency swap windows to get fresh dollar flows, and increasing money market rates to reduce speculation.
All of these resulted in the CAD coming down to 1.2 per cent of GDP in Q2 and the exchange reserves rallying for six weeks till mid December at over $295 billion as of last week.
The biggest leveller had been a drastic fall in gold imports and the $34 billion that RBI could gross by way of the two dollar swap windows. On the rupee front, the RBI report also acknowledged the role played by the offshore markets, saying there is an increase in the offshore turnover of emerging market currencies in the last few years. The report, however, stresses that the long-term solution to the external sector problems for the country lies in increasing the productivity and the export competitiveness.
It said the inflation differential between the advanced economies and the emerging ones like India is a potential source of volatility in the exchange rates as capital flows could abruptly change directions. However, it took note of the fact that the measures announced since September have contained volatility in the forex market. It is imperative to contain the inflation, the report said.
The emerging geopolitical situation and the increased availability of alternative energy sources like shale gas can also have a positive impact on the energy import bill, RBI said.
But ‘inflation still a block to easy money policy’
MUMBAI: Reserve Bank of India Governor Raghuram Rajan on Monday said that high inflation is limiting the central bank's ability to boost growth with an accomodative monetary policy.
‘The outlook for the economy has improved, with export growth regaining momentum, but growth is still weak. The challenges of containing inflationary pressures limit what the monetary policy can do,’ Rajan said in his foreword to the half yearly Financial Stability Report 2013 released Monday.
The report said a modest improvement in growth is envisaged in the second half of the current fiscal on the back of good monsoon which has boosted the prospects of summer crops and higher exports.
‘To maintain the momentum gained by the respite, it is imperative that long-delayed legislative reforms are pushed through, stalled infrastructure project clearances continue and fiscal consolidation remains on track,’ Rajan stressed.
It can be noted that the RBI has increased its key rates twice in the last three monetary policy reviews citing concerns emanating from high inflation while Rajan stayed away from increasing it for the third time earlier this month and chose to wait for clarity on data. The headline inflation by wholesale prices stood at 7.52 per cent in November, a 14-month high, while the same by consumer prices rose to a nine-month high of 11.24 per cent. The growth inched up to 4.8 per cent for the second quarter of the fiscal. The government is hoping the growth will touch the 5 per cent mark for the entire fiscal.
‘Some moderation is expected in food inflation going forward, (but) persistence of retail inflation remains a concern,’ the report said, adding ‘persistently high inflation’ and the consequent pressure on interest rates poses a downside risk to growth.
Gold policy should have some sort of import curbs: PC
New Delhi: Notwithstanding the likelihood of the current account deficit (CAD) narrowing to less than $50 billion, Finance Minister P Chidambaram on Monday made a case for continuing some kind of restriction on gold imports.
‘As a proposition, restraining gold imports is a correct move,’ he said. ‘We should also attempt to discover more gold in our own country,’ he said in an interview to CNBC-TV18.
In the third week of December, the US Fed announced that it would cut back bond buying by $10 billion a month to $75 billion from January on the back of improvement in the world's biggest economy.
‘The CAD is expected to be less than 3 per cent of the GDP during the current financial year,’ the RBI said in the half-yearly report. ‘On balance, the country's external position appears to be manageable and reserves seem adequate.’
CAD shot up to an all-time high of 4.8 per cent last year on account of a heavy trade deficit and higher gold imports. The high CAD, along with fears of tapering, was one of the reasons for the rupee touching a lifetime low of 68.85 against the dollar on 28 August this year. The rupee improved since then, but is still 14 per cent lower year-to-date.
The authorities acted on multiple fronts, curbing gold imports, opening currency swap windows to get fresh dollar flows, and increasing money market rates to reduce speculation.
All of these resulted in the CAD coming down to 1.2 per cent of GDP in Q2 and the exchange reserves rallying for six weeks till mid December at over $295 billion as of last week.
The biggest leveller had been a drastic fall in gold imports and the $34 billion that RBI could gross by way of the two dollar swap windows. On the rupee front, the RBI report also acknowledged the role played by the offshore markets, saying there is an increase in the offshore turnover of emerging market currencies in the last few years. The report, however, stresses that the long-term solution to the external sector problems for the country lies in increasing the productivity and the export competitiveness.
It said the inflation differential between the advanced economies and the emerging ones like India is a potential source of volatility in the exchange rates as capital flows could abruptly change directions. However, it took note of the fact that the measures announced since September have contained volatility in the forex market. It is imperative to contain the inflation, the report said.
The emerging geopolitical situation and the increased availability of alternative energy sources like shale gas can also have a positive impact on the energy import bill, RBI said.
But ‘inflation still a block to easy money policy’
MUMBAI: Reserve Bank of India Governor Raghuram Rajan on Monday said that high inflation is limiting the central bank's ability to boost growth with an accomodative monetary policy.
‘The outlook for the economy has improved, with export growth regaining momentum, but growth is still weak. The challenges of containing inflationary pressures limit what the monetary policy can do,’ Rajan said in his foreword to the half yearly Financial Stability Report 2013 released Monday.
The report said a modest improvement in growth is envisaged in the second half of the current fiscal on the back of good monsoon which has boosted the prospects of summer crops and higher exports.
‘To maintain the momentum gained by the respite, it is imperative that long-delayed legislative reforms are pushed through, stalled infrastructure project clearances continue and fiscal consolidation remains on track,’ Rajan stressed.
It can be noted that the RBI has increased its key rates twice in the last three monetary policy reviews citing concerns emanating from high inflation while Rajan stayed away from increasing it for the third time earlier this month and chose to wait for clarity on data. The headline inflation by wholesale prices stood at 7.52 per cent in November, a 14-month high, while the same by consumer prices rose to a nine-month high of 11.24 per cent. The growth inched up to 4.8 per cent for the second quarter of the fiscal. The government is hoping the growth will touch the 5 per cent mark for the entire fiscal.
‘Some moderation is expected in food inflation going forward, (but) persistence of retail inflation remains a concern,’ the report said, adding ‘persistently high inflation’ and the consequent pressure on interest rates poses a downside risk to growth.
Gold policy should have some sort of import curbs: PC
New Delhi: Notwithstanding the likelihood of the current account deficit (CAD) narrowing to less than $50 billion, Finance Minister P Chidambaram on Monday made a case for continuing some kind of restriction on gold imports.
‘As a proposition, restraining gold imports is a correct move,’ he said. ‘We should also attempt to discover more gold in our own country,’ he said in an interview to CNBC-TV18.
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