Rangarajan’s Re view differs from FM’s

Exchange rate depreciation might not have a big impact on exports but it would still be worthwhile to carry on with the rupee’s current level and not let it

Written by ENS Economic Bureau | New Delhi | Published: October 16, 2012 12:54 am

Exchange rate depreciation might not have a big impact on exports but it would still be worthwhile to carry on with the rupee’s current level and not let it appreciate further in real terms,Prime Minister’s Economic Advisory Council (PMEAC) chairman C Rangarajan said on Monday.

The rupee which gained 5-6 per cent against the dollar in the past few weeks,depreciated for the second straight day on Monday to close at 53.01,against last Friday’s 52.81.

The former RBI governor’s comments in an interview to MK Venu for Rajya Sabha TV seems to be at divergence with the views expressed by finance minister P Chidambaram in Tokyo recently on the sides of the IMF-World Bank meeting.

Chidambaram reportedly said he would expect the rupee to rise a little more so as to ease the pressure on the central bank to bear the burden of containing inflation by itself. “I don’t think exporters actually gain by the depreciation of rupee… a further rise in the rupee will help curb the increase in costs,” the minister said.

Chidambaram also made his preference for an interest rate cut,although without any specific reference to the upcoming policy review.

“Rates must come down and if the fiscal policy steps that we are taking encourage the central bank to take monetary policy action which will result in lower interest rates,” he said.

In the Rajya sabha TV interview,Rangarajan,however, sounded cautioning the RBI against opting for a rate cut. The second quarterly review of Monetary policy is due on October 30.

“The actual stance of the monetary policy (will have to) depend on the behaviour of inflation,” he said.

After the release of September inflation data on Monday (wholesale inflation unexpectedly spurted to a ten-month peak of 7.81 per cent in the month against the previous month’s 7.55 per cent), Rangarajan reiterated his stance,saying,“circumstances are not too favourable for a rate cut”.

He,however,expected inflation to drop to 7 per cent by the end of this fiscal.

When asked whether the rupee’s recent rise and the predicted further strengthening of the currency has now made a case for loosening of policy via rate cuts,Rangarajan was cautious. He said: “… if despite the (high) current account deficit,the rupee is appreciating,it is because of (large) capital flows. If capital flows are large,I would argue that liquidity is also coming into system.”

With the trade deficit remaining high,the current level of exchange rate would be appropriate. Making his position further clear,Rangarajan said,“I believe they (RBI) should take a call based on inflation numbers.” FE

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