Prime Minister's Economic Advisory Council Chairman C. Rangarajan, on Monday, favoured utilisation of foreign exchange reserves to stem the depreciation in value of the rupee caused by the slide in capital flows.
Addressing a round table organised here by the PHD Chamber of Commerce and Industry on global slowdown of advanced economies and its impact on India, Dr. Rangarajan said: “Globalisation cuts both ways. We have withstood [the] global crisis to a large effect because we are largely still looking at domestic economic factors. We can target a growth rate higher than 7 per cent for the current fiscal year if we successfully address three key issues of managing inflation, fiscal deficit and current account deficit”.
Pointing out that the slide in rupee value was largely owing to a high current account deficit (CAD) and the exchange reserves, which were not dwindling at a fast pace, could be used to contain the extreme volatility, he said: “If the assessment is that depreciation in rupee is being caused by temporary fluctuation of capital flows, reserves must be used in order to see that impact is not felt on [the] rupee … One step should be to use the forex reserves in order to be able to prevent the rupee from falling sharply.”
With the Indian currency witnessing a value erosion of about 8 per cent since early March and the foreign exchange reserves having come down to about $290 billion now, the Reserve Bank of India (RBI) had directed exporters last week to bring 50 per cent of their foreign holdings back home so as to increase the availability of the greenback in the market and thereby contain the pressure on the rupee.
However, despite these steps, the rupee slipped to an all-time low to close Monday's trading at 53.96 against the US dollar, in view of a fresh set of negative data pertaining to inflation in April.
Since the rupee depreciation has been mainly on account of a high CAD — it touched 4 per cent of GDP at the end of December last year — following a higher quantum of imports and services in value terms as compared to exports coupled with large withdrawals by FIIs (foreign institutional investors) from the bourses, Dr. Rangarajan pointed out that the country would have to get used to a higher level of CAD for some time.
“CAD is high and that has an impact on foreign exchange market and on [the] rupee. We have to reckon with the fact that CAD will continue to remain at high level,” Dr. Rangarajan said, while projecting a CAD level of about 3 per cent in 2012-13. “If inflation is comparably high in India at 6-7 per cent versus 2-3 per cent in advanced economies, then the rupee depreciation was inevitable. If we are able to control the inflationary scenario, we can expect a decline in current account deficit in 2012-13 fiscal year,” he said.
