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Finance Minister P Chidambaram and Reserve Bank of India (RBI) Governor D Subbarao on Thursday sought to assuage investors after the rupee breached the 65-a-dollar mark in intra-day trade.
They said capital inflows would correct the position in due course and there was enough firepower in the form of foreign exchange reserves to curb excess volatility in the rupee.
The finance minister said the ministry was exploring structural measures to further reduce the current account deficit (CAD) to sustainable levels and improve capital inflows.
Chidambaram said the first quarter gross domestic product (GDP) would be flat, but asserted that it would recover from the second quarter, on the back of increase in sown area, pace in acceleration of Plan expenditure and clearance of infrastructure projects.
India's GDP grew 5.4 per cent in the first quarter of 2012-13 and the numbers for April-June 2013-14 are slated to come on August 30.
The finance minister was closeted with the outgoing RBI governor, governor-designate Raghuram Rajan and Economic Affairs Secretary Arvind Mayaram for hours as the rupee swung up and down against the greenback. "There are tidal forces acting on the rupee," Subbarao told reporters, referring to uncertain external conditions.
Chidambaram said the currency was undervalued and had overshot what was generally believed to be a reasonable and appropriate level.
The RBI governor said the central bank was not taking a position on the rupee value, but could not allow it to overshoot as it would be difficult to bring it back to the original level.
The finance minister and Subbarao held separate press conferences. Rajan was present at the conference with Subbarao, but he did not speak. Subbarao said his farewell advice to Rajan would be that RBI under him should interact more with media.
When asked why RBI was giving confusing signals to markets by choking short-run liquidity last month and then augmenting the long-run money supply earlier this month, Subbarao said the central bank was reacting to developments on the rupee front, which was being misinterpreted as providing contrasting signals. "I admit, we were reacting to developments on the external front," he said.
The governor said RBI had adequate foreign exchange reserves to deal with the declining value of the rupee and to finance the CAD.
The country's foreign exchange reserves were up at $278.602 billion as of August 9, compared with $277.17 billion a week earlier.
Chidambaram said there was no need to for "excessive and unwarranted pessimism" over the rupee depreciation. "We are confident that stability would return to these markets and we would get on with the task of promoting investment and growth. Stronger growth would, in course of time, alleviate many of the challenges that we face."
The governor said the recent measures taken by the RBI to curb volatility of the rupee would continue till the stability was restored.
"We have taken those measures again in order to curb volatility and certain outflows and we would revisit them as stability returns," he said.
The governor disclosed that the RBI's analysis suggested that the elasticity coefficient of 10 per cent depreciation of the rupee to inflation had risen to 1.2 per cent from one per cent earlier.
Chidambaram said there was no need to for "excessive and unwarranted pessimism" over the rupee depreciation. "We are confident that stability would return to these markets and we would get on with the task of promoting investment and growth.
"Stronger growth would, in course of time, alleviate many of the challenges that we face."
India's debt indicators, he said, were within the prudent limits. "The overall public debt to GDP ratio has declined from 73.2 per cent in 2006-07 to 66 per cent in 2012-13. The economy's external debt is only 21.2 per cent of GDP. India's reserves are USD 277 billion." he said.
The minister reiterated that the government would make all efforts to contain fiscal deficit at 4.8 per cent and CAD at 3.7 per cent of GDP or USD 70 billion this year.
Admitting that there was a rise in non-performing assets of the banking sector, Chidambaram said the government was making efforts to push stalled projects.
He said all banks had a capital adequacy ratio higher than the Basel norms and the government intended to infuse Rs 14,000 crore this financial year to capitalise the public sector unit banks.
