The Reserve Bank of India (RBI) on Saturday said it would use all tools available to arrest rupee fall if the currency’s downward spiral escalates. The central bank also affirmed that it would take steps to ensure adequate liquidity though cut in reserve ratios is not an option as of now.
“We do have the instruments and the capacity to enhance the supply of foreign exchange into the markets, and as demonstrated by the recent actions, will use them as appropriate,” RBI Deputy Governor Subir Gokarn said. He said “smoothing” interventions have been carried out and reiterated that the central bank’s policy remains to curb volatility in the foreign exchange rate.
The Indian currency has depreciated close to 17 per cent since July 2011 on the back of global risk aversion. “If we do see the short-term risk of a downward spiral escalating, we will not hesitate to use all available instruments,” Gokarn said.
On Friday, rupee closed at 51.20 against the dollar to post a weekly gain for the first time in the past month. The currency has lost around seven per cent in November, a month when it fell to an all-time low level of 52.70 against the greenback. In order to attract foreign currency flows, RBI announced a slew of measures last month.
It increased the limit on foreign investment in government and corporate debt instruments, raised ceilings on interest rates on non-resident deposits and also enhanced the all-in-cost ceiling for external commercial borrowings.
“All these channels will help expand the inflow of foreign exchange. These capital-control measures have been supported by a series of administrative measures, which are aimed at curbing the capacity (or temptation) of market participants to take positions against the rupee, which may further aggravate the pressures to depreciate,” Gokarn said.
He said India has large reserves but because of the current account deficit, the reserves are essentially offset against the country’s external liability position. According to latest data, India’s foreign exchange reserves fell by $4 billion in a week to $304 billion as on November 25, 2011.
On liquidity, Gokarn said at present the Indian banking system holds government securities to the tune of 29 per cent of net demand and time liabilities (NDTL), which is above the statutory requirement of 24 per cent. “This reflects a relatively large capacity for liquidity infusions, about Rs 2.74 lakh crore, as and when the need arises,” he said.
“We have been injecting liquidity into the market through the liquidity adjustment facility and open-market operations, and we will continue to do so as conditions warrant,” he added. RBI has infused around Rs 15,000 crore of funds by bond purchase through two rounds of Open Market Operations this financial year. Yields on the government bonds had shot up to three-year high levels of above 8.5 per cent after the announcement of higher borrowing programme. As a result, three of five auctions saw devolvement on primary dealers.
The RBI deputy governor said there were no intentions to tweak tools like Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) as of now. “We must keep in mind that they straddle the divide between liquidity and monetary management, which, at the current juncture, we are intent on maintaining,” he said.
He said the slowdown in growth as indicated by recent industrial production numbers is in line with policy expectations and will lead to moderation in inflation going forward. However, persistent global turbulence is always going to adversely impact the investment climate, which may be further aggravated by domestic conditions, he said. On food inflation, he said although the recent data indicate moderation, food inflation will be a persistent source of inflationary pressures unless there are significant improvements in productivity, both at the cultivation stage and in the distribution process.
