RBI Governor Raghuram Rajan on Wednesday sought to soothe frayed market sentiments and volatility in the bond and currency markets.
“It is important that the RBI clarifies the importance of economic events and the likely direction of policy in times of uncertainty so that the market worries about the right things and does not get into a tizzy about the wrong ones,” said Rajan at a hurriedly called press conference.
The central bank chief said the worry expressed by market participants that demand for dollars from oil marketing companies (OMCs) will add to further downward pressure on the rupee “is a non-issue”. The process of the OMCs returning to the market started on October 14.
“The market absorbed the demand smoothly. In fact, participants did not even know until some talk from the Finance Ministry. I have no doubt that once markets calm down, the OMCs’ remaining demand will be absorbed easily. We have no intention of rushing this process,” said Rajan.
Special window
The RBI had opened a special window for OMCs to source their dollars directly from the RBI rather than from the market. This was done to quell currency volatility.
On Wednesday, the rupee touched a nine-week low of 63.88 against the dollar. It has been depreciating since last week following a comment by a Finance Ministry official that 30-40 per cent of the dollar requirements of oil companies were being met from the market.
Following the RBI Governor’s comments, the rupee jumped to end 41 paise stronger at 63.31. The benchmark 10-year government bond yields softened 13 basis points to 8.92 per cent, marking the biggest fall in five weeks. Rajan said the market’s fears are overstated and that at such times, it makes sense to “take a deep breath and examine the fundamentals.” He said the RBI raised $18 billion through FCNR(B) deposits by NRIs and the swap window.
“So, even if foreign investors pull out significantly more money this year than they have so far, we still can break-even on capital flows,” added Rajan.
The Governor also estimated that the current account deficit will be around $56 billion or 3 per cent of GDP. This is $32 billion less than last year.
Rajan said that the market had seen some tightness in liquidity and, hence, the RBI would inject Rs 8,000 crore into the system through open market operations on Monday.
Inflation worries
Rajan added that food inflation was still worryingly high and the effects of the harvest are still awaited.
“The momentum for core inflation is also downwards. The market is worried about what this data means for policy rates. But as we have said before, RBI is concerned about the weak economy as well as high inflation.
“We believe the weak economy, increase in food supply and recent policy rate hike will provide a disinflationary impetus over time. Recent data do not dispel this view,” he added.