Exchange rate variations will stay within an acceptable range due to a moderate surplus on the capital account after meeting the current account deficit, according to C Rangarajan, chairman of the prime minister’s Economic Advisory Council.
The current account deficit for the year is likely to be around 2.7 per cent of the gross domestic product. Capital inflows were expected to be almost $73 billion, which would cover the current account deficit and add a modest $31 billion to the reserves, he said.
“Our current account deficit has remained small, even though there was some tendency for it to rise in the last few years. We must take action to bring down the current account deficit, even though this will not pose a financing problem, as capital inflows are expected to be adequate,” he said.
Monetary policy had its own role to play, though some coordination was needed between the monetary policy and the fiscal policy, particularly when inflation was high, he added.
A good monsoon should lower the pressure on inflation, he said. “Our projections show that agriculture will grow between four and five per cent this year. This will have a favourable effect on foodgrain availability and will dampen inflationary expectations. Both taken together, it should lead to a decline in prices of foodgrains,” he said, while delivering a lecture on ‘Globalisation and the International Financial Crisis’ on Saturday at the School of Management Studies, University of Hyderabad.