With the Indian rupee headed towards the 59 mark against the US dollar,hitting 58.98 in intraday trade on Tuesday,chief economic advisor Raghuram Rajan attempted to play down the weakness in the currency,saying gold imports were expected to taper off while the current account deficit would narrow. The government,Rajan said,was keeping all its options open,including larger FDI limits for some sectors,and the CEA did not rule out NRI bond issuances. The finance ministry,Rajan said,would recommend to the Cabinet policy measures to rein in the current account deficit,though he believed no additional restrictions on gold imports might be taken immediately. Excerpts from the media interaction: For which sectors will the government raise the FDI cap? You know the sectors which are usually discussed. We will be looking at all sectors,and we will be making recommendations in the next couple of weeks. Are you looking at a sovereign bond issue or an NRI bond issue overseas? I think we will be exploring all ways to enhance the safe financing of the CAD. You mentioned two of the ways people have suggested. If any one of these measures is going to come to the fore,we will have to see over the next few days. What could be the quantum of NRI bonds issued,if they are? Its still early days and again,there is no sense of panic in the government that new measures have to be taken. The measures that we are announcing are those that we have been contemplating over time,and I think the rollout is just happening over a period of time. We have been examining those issues for months and we will undertake them as and when they come on the front burner. Is there a sense of alarm with where the rupee is? Some say it could reach 60. It is important to look at fundamentals and when you look at the real effective exchange rate,it would suggest that the numbers that you are talking about are extreme. They would suggest the rupee would become significantly undervalued at that point. We do not like volatility in the rupee and as I said the authorities Sebi,the RBI,etc will act when they feel the time has come. From our side,our intent is to create the conditions both for narrowing the CAD as well as of stable financing of CAD. The rest,the short-term volatility,we have to look through,because it will dissipate eventually. There will be some short-term reactions. Obviously,if the currency depreciates a lot,it will have an effect on inflation because your imports become costlier,and that will feed into inflation. So,to that extent,your point is absolutely correct. Do we warrant that depreciation? I am arguing no. Because even now,you could argue that we are beyond what is warranted by fundamentals. Does the depreciation make the upcoming RBI policy decision more complicated? Well,the RBI has to consider a large number of factors in deciding its policy; it doesnt look at just one number. The level of rupee the exchange rate will be an input and the RBI has said on a number of occasions that it would be considering it. What the net effect will be on the policy rate decision,would be not right for me to speculate on. Why are the equity flows not strengthening? What is encouraging is the strength of equity investors in India and the fact that net equity flows have remained close to positive at this point despite all the turmoil in financial markets. My guess is as the exchange rate stabilises,we will see a resumption of equity inflows,as the realisation dawns that Indian assets are indeed quite cheap. When the Fed starts tapering off asset purchases,when the Fed starts raising interest rates,automatically money will flow out of India. There will be a short-term reaction. The so-called hot money will go out but that doesnt mean that we wont get more inflows. So,our sense is,let us focus on creating the fundamental conditions,and creating the possibility that longer-term inflows are also enabled. What other steps can you take to ensure longer-term flows? I think you have to take all the steps that have been undertaken over time,as a package. The fundamental actions we have to take are to set the economy on a firm footing. That includes narrowing the CAD which is really very important,which was done earlier,including in the Budget. That also includes restoring the conditions for investment and growth,which we are in the process of engaging. So,when you put that package together,the real fundamentals of the economy look good,and then,the financial fundamentals will follow. So FDI and longer term FIIs reduce the transaction costs for people to come into India,and this will be in our best interest. This will also help the economy grow sustainably. We are not too worried about reacting to the immediate,but want to create the longer-term conditions which we are engaged in. One of the biggest dollar consumers are oil marketing companies (OMCs). While the prices of oil have come down,do you think there will be a reduction in dollar demand? I think it would be a mistake to blame OMCs for any volatility in exchange markets. The OMCs have agreed to spread their demand wherever its punched and I think they are engaged in doing that. So,I think you should see that what happens in India is unique to India. A lot of this is due to external factors also. Plus to repeat,gold is coming off substantially. In addition,exports are starting to pick up more strongly. That is,to some extent,some good news. And I think over time,CAD will narrow; so,those are reasons to hope that from a fundamental perspective,this volatility will be unwarranted. Has the RBI intervened in the forex markets today? Are there hot money flows in the debt segment? First,I will not speculate on RBI intervention. As I said,each one is keenly watching the markets and will do what is necessary. On the FII inflows,I think that if you look at it since April 25th,where we reduced the withholding tax,on net we got $1.5 billion worth of debt inflows. So,I think the gross number is about $4 billion and $2.5 billion went out in recent weeks. So,we had $1.5 billion. Whether you call that stable or unstable,the whole point is that we are trying to reduce the barriers to get into India. Debt flows have been positive on net and equity inflows have been highly positive. What are your expectations on CAD and GDP growth for April-June? I dont know what precise numbers I would put on that. In the first half of quarter,we had substantial gold imports that tended to expand the CAD. Since then,we have seen a substantial shrinking which will tend to reduce it. On net,we have to wait till the end of the period. I would guess from a growth perspective,we should be on our way up from where we were. At least preliminary PMI indicators on services,services growth is picking up and since that accounts for 60% of the economy,this is one of the reasons to believe that growth will be picking up when you see the Q1 numbers.
