Finance Minister P. Chidambaram has said that steps taken by the Reserve Bank of India to arrest the slide of the rupee should not be taken as signal of higher interest rates to come.

“I believe that these measures are short term and certainly these measures should not be interpreted as a prelude or as a precursor to some kind of policy tightening of policy rates,” Chidambaram said addressing a conclave of Venture Capitalists.

RBI’s measures had a positive impact on the rupee on Tuesday which ended at Rs 59.31 against the dollar, nearly one per cent higher than Monday’s closing of Rs 59.81. The rupee has depreciated nearly 9.5 per cent since April 1.

After meeting with the Finance Minister and Ministry officials, the RBI announced a slew of measures late on Monday. These measures included raising the Marginal Standing Facility rate and Bank Rate to 10.25 per cent.

It also capped the amount lent at repo rate of 7.25 per cent at about Rs 75,000 crore, and announced sale of Government bonds worth Rs 12,000 crore today under its open market operations. All these measures aim to make the cost of borrowed funds higher for banks. This also indicated a hike in interest rates on deposits and advances for bank customers.

“These are measures that are taken to quell speculative activity and to stabilise the rupee and I am confident the rupee will stabilise,” he said.

The Government is not targeting a level for the rupee, but the currency may have fallen more than it should, he said. “We want volatility to be contained so that we can get on with the business of attracting investments into the country,” said Chidambaram.

Inflation

The Finance Minister hoped that inflation will come down to tolerable levels if crude oil prices do not rise again. He said the Government has taken steps and more measures will be taken on the supply side bottlenecks to moderate it.

“But I can’t promise you zero inflation. If crude oil prices do not spike up again, we can contain inflation to a tolerable level,” Chidambaram said. Inflation, as measured by the Wholesale Price Index, which was hovering around nine per cent, has been brought down to below five per cent in the last nine months.

Current Account Deficit

Chidambaram said the deficit was financed last fiscal without dipping into the foreign exchange reserves. He also claimed that the deficit was not only fully financed but $3.8 billion was added to forex reserve in 2012-13.

“We are doing our sums and we are confident that with some stern measures that we have taken and we will take, we can contain the CAD to a level below last year’s CAD. We will finance it fully and safely without running down reserves,” he said

shishir.sinha@thehindu.co.in

(This article was published on July 16, 2013)
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