A day after Reserve Bank of India (RBI) took a slew of measures like raising cost of borrowing by banks by 2 per cent to arrest sliding rupee, Finance Minister P Chidambaram said Government was targeting a level for the fluctuating rupee while Planning Commission Deputy Chairman Montek Singh Ahluwalia admitted there would be some pain due to the action in short term.
RBI measures born fruit on Tuesday as the domestic currency surged 58 paise, the most since June 28 to end at 59.31 against the dollar. Rupee had closed at 59.89 on Monday. The rupee had plunged to a record low of 61.21 on July 8. While RBI move was good for rupee as it recovered smartly, bourses encountered a crash as soon as they opened up in the morning and all interest rates sensitive sectors lost hugely initially. Finally, it closed at 19,851.23 as it tumbled 183 points while Nifty fell 1.25 per cent to 5,955.25.
Chidambaram also dismissed fears that RBI decisions last night could lead to tightening of interest rates. He does not expect banks to increase their lending rates in the aftermath of the RBI’s decisions which he said were taken to arrest excessive speculation and volatility in the forex market.
He seems to be correct as one of the State run bank Punjab National Bank said that the bank did not see any need to change the lending rates presently. “PNB considers the measures taken by RBI on Monday as a step to curtail volatility and speculation in forex rates and does not see the RBI action as indicative of any systemic issue. PNB expects the market to stablise shortly and therefore does not see any need to change the lending rates presently,” said a statement from the bank on Tuesday evening.
Chidambaram also said that steps taken and those to be taken will moderate inflation and contain the high Current Account Deficit (CAD).
“These measures (RBI decisions last night) are intended to quell excessive speculative activity in the foreign exchange market and to stabilise the rupee. I believe that these measures are for short term and certainly should not be interpreted as a prelude or precursor to some kind of tightening of policy rates.
“I am confident that rupee will stabilise. We are targeting a level for the rupee. But there are times when each one of us know intuitively that the rupee may have slid more than it should. Therefore, we want the rupee to stabilise. We want volatility to be contained,” he said while addressing venture capitalists and private equity funds in Delhi. Earlier in the day, he told a press conference in Jaipur: “These measures should not be read as prelude to any policy rate changes. This has nothing to do with upcoming policy review of RBI...I don’t expect banks to increase interest rates as a result of yesterday’s measures”.
RBI last night announced a slew of measures like raising cost of borrowing by banks by 2 per cent to 10.25 per cent and announcing sale of bonds worth Rs 12,000 crore through open market operations to suck liquidity to check rupee slid, which had earlier in the month touched a all low of 61.21 to a dollar.
“We have got an overall situation where the RBI did what was necessary to signal to market that the exchange rate is being pushed into an unreasonable range...But of course, in the short run there is going to be some pain and also some worry, that’s understandable,” Ahluwalia told CNBC-TV18. Elaborating further he said, “When the stability will be restored the RBI will be able to wind out this intervention... but you know taking it (rupee value for a USD) at 60 you have to give some signal otherwise there is a serious danger of overshooting,” Ahluwalia told the news channel.
The Government which has been saying that value of rupee will be decided by the market for the first time today spoke of targeting a level for the currency.
Chidambaram said inflation will come down to tolerable levels if crude prices do not rise again and assured investors that current account deficit (CAD) would be financed without dipping into forex reserves.He said the Government has taken steps and more measures will be taken on the supply side bottlenecks to moderate it. “But I can’t promise you zero inflation ... If crude oil prices do not spike up again, we can contain inflation to a tolerable level”, Chidambaram said.
On CAD, he said the deficit was financed last fiscal without dipping into foreign exchange reserves, and this year it would be contained below the 2012-13 level of 4.8 per cent of the GDP.