 "Time to capitalise on better CAD, says RBI")
After having raised concerns for many quarters over the external sector’s vulnerability, the Reserve Bank of India said on Tuesday that the economy could effectively manage these risks, with the improved global trade climate and a sharp decline in the current account deficit (CAD).
The rise in foreign exchange reserves has also provided strength. Yet, this should not breed complacency, as capital flows could be impacted by the US Federal Reserve’s tapering, which began this month, of its massive bond-buying programme, RBI said in its review of macroeconomic and monetary developments in October-December 2013.
A sustained improvement in India’s trade performance over the long run will hinge on the pace of global recovery and improvement in the competitiveness of our exports, RBI said. The trade deficit contracted in December (year-on-year), for a sixth month in continuity, on the back of adjustment of the rupee exchange rate and a slowing in imports, particularly of gold.
Beside this sharp drop in CAD, renewed capital inflows, bolstered through the Reserve Bank’s swap windows, helped reduce external vulnerabilities and boost confidence. RBI has been able to add $34 billion to forex kitty by swapping dollar for rupees. It offered a currency swap facility at 3.5 per cent for FCNR(B) deposits. It also offered banks a one-percentage point lower swap rate than the market rate for dollar borrowings against tier-I capital. It ran the swap window for the three months ending November 30, 2013.
The forex reserve loss earlier in the year has been more than recouped and near-term external vulnerabilities have been mitigated. Since end-August 2013, India’s foreign exchange reserves had surged by $16.6 billion to $292.1 billion as on January 17, 2014.
On December 18, 2013, the US Fed announced a modest tapering of Quantitative Easing from January 2014. In sharp contrast to the experience in May 2013, the Indian rupee exhibited strong resilience in relation to other currencies in terms of exchange rate movements and its volatility in the post announcement period. This was mainly because of the rebuilding of buffers and shrinking of the CAD supported by appropriate policies, including exchange rate adjustment.
RBI said as the capital flows to EMDEs could moderate over 2014-15, there is no scope for complacency. The breather provided by a reduction in the immediate risks needs to be used for developing the resilience of the external sector over the medium term, it added.
The rise in foreign exchange reserves has also provided strength. Yet, this should not breed complacency, as capital flows could be impacted by the US Federal Reserve’s tapering, which began this month, of its massive bond-buying programme, RBI said in its review of macroeconomic and monetary developments in October-December 2013.
A sustained improvement in India’s trade performance over the long run will hinge on the pace of global recovery and improvement in the competitiveness of our exports, RBI said. The trade deficit contracted in December (year-on-year), for a sixth month in continuity, on the back of adjustment of the rupee exchange rate and a slowing in imports, particularly of gold.
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The CAD fell from 4.9 per cent of gross domestic product (GDP) in the financial year’s first quarter to 1.2 per cent of GDP in the second quarter. The CAD for 2013-14 is likely to be contained within a sustainable level of about 2.5 per cent of GDP.
Beside this sharp drop in CAD, renewed capital inflows, bolstered through the Reserve Bank’s swap windows, helped reduce external vulnerabilities and boost confidence. RBI has been able to add $34 billion to forex kitty by swapping dollar for rupees. It offered a currency swap facility at 3.5 per cent for FCNR(B) deposits. It also offered banks a one-percentage point lower swap rate than the market rate for dollar borrowings against tier-I capital. It ran the swap window for the three months ending November 30, 2013.
The forex reserve loss earlier in the year has been more than recouped and near-term external vulnerabilities have been mitigated. Since end-August 2013, India’s foreign exchange reserves had surged by $16.6 billion to $292.1 billion as on January 17, 2014.
On December 18, 2013, the US Fed announced a modest tapering of Quantitative Easing from January 2014. In sharp contrast to the experience in May 2013, the Indian rupee exhibited strong resilience in relation to other currencies in terms of exchange rate movements and its volatility in the post announcement period. This was mainly because of the rebuilding of buffers and shrinking of the CAD supported by appropriate policies, including exchange rate adjustment.
RBI said as the capital flows to EMDEs could moderate over 2014-15, there is no scope for complacency. The breather provided by a reduction in the immediate risks needs to be used for developing the resilience of the external sector over the medium term, it added.