A rally in the rupee, Asia’s best performer in the past month, was “not a matter of concern yet”, Finance Minister Pranab Mukherjee said, allaying the fear expressed by Infosys Technologies that a strengthening currency would hurt exports.
“I would not like to have any unrealistic appreciations or depreciations,” Mukherjee said in an interview at Birbhum in West Bengal yesterday. “We should watch the situation, but it’s not a matter of concern. We need not press the panic button.”
The currency has advanced 5.2 per cent in the past month and become Asia’s best performer, prompting Infosys, the nation’s second-largest software maker, to say the trend will “kill the export industry”.
Reserve Bank of India Governor D Subbarao yesterday said the central bank would intervene if inflows are “lumpy and volatile” and disrupt the economy.
Subbarao had on October 9 said India’s current account deficit had boosted the nation’s ability to absorb inflows and therefore the central bank “did not feel” the need to intervene like most emerging markets.
India’s current account deficit widened to a record $13.7 billion in the three months ended June 30, as an accelerating economy boosted imports of oil and machinery. The International Monetary Fund had on October 6 raised its 2010 economic growth forecast for India to 9.7 per cent from 9.4 per cent it had estimated in July.
Foreign flows
The rupee gained as global investors poured a record $23 billion into local shares and $10 billion in rupee debt this year to profit from India’s economic expansion.
Exchange rates dominated the annual meeting of the International Monetary Fund in Washington last week on concern that officials were relying on cheaper currencies to aid growth, risking retaliatory devaluations and trade barriers. Central banks intervene by buying or selling their currencies to influence exchange rates.
Infosys called on the central bank to intervene and reduce the volatility of the currency.
“We’ve seen the rupee go from 52 to 39 and back and forth,” Infosys Chief Financial Officer V Balakrishnan said yesterday in Bangalore. “It will kill the whole export industry. RBI has no choice but to intervene at some point in time, like every other country. I’m not the RBI governor, but if I was, I’d do it now.”
India has allowed its currency to gain even as central banks from Brazil to Israel and Thailand intervened in foreign exchange markets. Japan sold yen last month for the first time since 2004 and Brazil warned of a global “currency war.”
Intervention signal
RBI Deputy Governor Subir Gokarn signalled yesterday the central bank might intervene in the currency markets to shield exporters.
“It comes down to a balancing act between making sure there’s enough money to finance your current account deficit, but, at the same time, not do any serious damage to people whose competitiveness is undermined for no fault of their own,” Gokarn said at a conference organised by Bloomberg UTV in Chandigarh.
Subbarao yesterday said RBI might intervene if the inflows disrupted the economy.
“That remains our policy, but I cannot comment when we will intervene or when we will not,” Subbarao said after the central bank’s board meeting in Chandigarh.
Economists, including Jahangir Aziz of JPMorgan Chase, said recent concerns about the strengthening currency “appear to be overblown”.
‘Little sensitivity’
“Exports show little sensitivity to changes in the exchange rate,” Aziz wrote in a note dated October 14. “Changes in external demand have a much larger impact.”
India’s merchandise exports have grown 28.6 per cent in the five months through August, according to commerce ministry data.
Mukherjee said funds were flowing into emerging markets like India because of a “slow recovery” in the US and Europe.
“As soon as the recovery in Europe and America begins, I think the inflow will be a little reduced,” he said.
The Bombay Stock Exchange’s benchmark Sensex has rallied 15 per cent this year to near a record, making it the best performer among the world’s 10 biggest stock markets.
“Of course, I would not like to have any volatility in the stock market. Already, it is there little bit,” Mukherjee said, when asked if the government planned to check foreign investments into the stock market. “At what time the cap is to be put, that is a matter of assessment,” he added.
