RBI intervened on Tuesday to stem rupee fall: Ahluwalia

The Reserve Bank of India (RBI) intervened in the foreign exchange markets on Tuesday to halt the rupee's slide, the deputy chairman of the Planning Commission Montek Singh Ahluwalia told CNBC-TV18 on Wednesday. He says the description of free-fall for the currency is "not justified".

According to reports, traders had spotted the central bank selling dollars via state-run banks starting at around 58.95 levels, after the unit fell to a record low of 58.98.
Ahluwalia assured that the government is not waiting on the sidelines and the fall in rupee will be addressed. He says the finance ministry believes the rupee will correct itself.
The government is taking a number of steps to correct real supply constraints, including simplifying FDI rules, he says.
However, Ahluwalia admits that the Indian economy is not at the strongest position. Also Read: Four factors that will decide rupee movement near-term Below is an edited transcript of Ahluwalia's exclusive interview on CNBC-TV18. Q: Do you agree with the Secretary of Economic Affairs that rupee has fallen because of a speculative attack or do you think this fall is tying in with the weakness in other emerging market (EM) currencies, markets or economies, which are running large currency account deficits (CAD)?
A: The finance ministry has actually said in another context that, if you look at it, globally, it is not just the Indian currency that has fallen. Quite a lot of emerging market (EM) countries, actually most of them that have current account deficit (CAD), have seen depreciation. Some more than us like South Africa, some comparable like Brazil or Turkey. There is a global phenomenon here; currencies have been volatile and the whole focus of the exchange rate between the rupee and the dollar tends to exacerbate because actually the dollar has been appreciating a little bit possibly on inflows into the US in anticipation of the fact that the reversal of the quantitative easing (QE) 3 might take place. That would tend to increase bond yields, which would actually increase bond prices. So you would expect that people would move into US financial assets and that will strengthen the dollar against many other currencies. So I think that is a relevant factor.
As far as the Indian economy is concerned, we are not at the moment at our strongest. We do have a CAD, which is too large and we are taking steps to bring that under control. Now in that environment when you have global volatility you can see the currency move around. What you call speculation and what you call market operation are always very difficult to distinguish. So I personally think that what you are seeing is a bouncing around of the currency. I don't believe that the description ‘free fall’ which many people have used particularly in media is at all justified. Yes we are seeing a slightly sharper depreciation than you would expect and the Finance Ministry feels that this will correct itself. It certainly would continue but that is ultimately something that will be determined by short-term market pressures, we cannot predict it.
The important thing to remember is we are not defending any particular rate but at the same time the Reserve Bank of India (RBI) intervenes when it feels that things are getting pushed a little too far. They did intervene yesterday which suggests that they felt that market pressures were pushing the currency to an unnecessarily low point and that did lead to some reaction. I don't think one can say anything more than that when you are dealing with an exchange rate that is market determined. Q: At the same time there has been talk yesterday of an NRI bond issuance etc which means that it is not exactly that the government is watching from the sidelines and not worried about the way the rupee has come off because otherwise why would they talk about an NRI bond issuance at this point?
A: Let's be very clear about it. The government is certainly not waiting in the sidelines and simply expecting things to correct themselves. The important thing to look at is not whether we issue our bond or not. Those discussions are always on, I have no detailed information of what exactly is being considered but the government has said that number one we must address the CAD. So government policy has to be judged by our own statement that we do not think that last years CAD is sustainable and we have taken a number of steps to bring it down. So it is not just a question of financing, we are not expecting to finance a 5 percent CAD, we expect it to be significantly lower and I think markets should look at what is it that we are doing to bring that down.
We are doing quite a lot, one, the fiscal deficit is being brought more effectively under control. Last year that was even targeted and a further reduction is expected this year which I am sure will be achieved. Two, investor confidence, confidence on the part of Foreign Direct Investment (FDI) investors, number of steps have been taken primarily to correct some of the real supply constraints affecting the economy and these decisions particularly on coal supply etc are currently in the works and I expect to see a resolution of that very shortly. That is very important in giving investors the confidence that the investments that have been made in power generation are not going to be ignored in terms of their fuel supply agreements.
A number of other steps are being taken, which relate to policy on FDI. There is a commitment that is looking at what FDI rules are and how they can be simplified. So I call all these as substantive steps designed to restore investor confidence and also to reduce the CAD. Now within that yes we can look at other instruments of financing and certainly bonds of the kind that have been talked about are one of them.
But I don't think that is going to be a very large part of the solution. It is the totality of or effort to convey the impression that the CAD is being brought under control and that the economy is going to rebound. That is what we should really concentrate on. Right now there is evidence that it sort of bottomed out but not enough evidence to suggest how strongly it is going to rebound.
I believe we have an opportunity in the current year to go back to something like 6 percent growth from the 5 percent that was achieved last year. Ideally, we should go even above 6 percent but it is very difficult to predict what will happen. Once investors see that the Indian economy is back on a higher growth path then financing the deficit through normal flows will not be all that difficult.
_PAGEBREAK_ Q: Let me talk about this financing issue. The US bond yields, as you would well know, have started hardening and that is putting a lot of pressure on EM currencies. Foreign institutional investors (FIIs) have sold quite a bit of Indian debt also in the last fortnight as you would know. Do you think financing the CAD might become a challenge if this kind of global mood were to prevail?
A: Certainly financing the CAD was always known to be a challenge. In fact, in every single official statement ranging from the 12th Plan documents to what the Finance Minister (FM) has said, what the Prime Minister has said, we have said this is a major challenge. That is why to address that challenge I don't think you talk about one instrument or one initiative. If you what to finance a CAD of this size, the government has to have full deployment of policy which will reassure people that the Indian growth story is back, India welcomes foreign investments, we address the concerns that foreign investors have and we remove supply constraints which are holding back the fulfillment of a lot of investments that have just matured particularly in the power sector. We need to display and which we can do may be in the next few weeks even, we need to display a series of positive steps which are being considered and therefore I think it is quite possible that we will be able to put across a very positive picture. Q: The worry which has cropped up in the last 10 days is how much damage the recent depreciation of the rupee will do in unraveling some of those improvements in terms of again subsidies on imports going or imported items going up, creating a deficit problem or even feeding through to inflation. Do you think the rupee has torn out some of the repair fabric that you were trying to put out?
A: Depreciation always creates some collateral effects. It introduces some positive features. The exchange rate correction improves the competitiveness of domestic industry against imports, it improves the competitiveness of exports against other exporters. I see the news papers today for example that many of our exporters are saying that other currencies have depreciated more and they are concerned about our loss of competitiveness. So the exchange rate movement has many effects. One of the effects certainly is that imports become more expensive. That is why domestic production becomes more competitive.
How much does imports becoming expensive feed into inflation? It depends on what happens to other prices. So this is where a well balanced monetary policy supported by expanding supplies and some weakening of the exchange rate is quite consistent with having a reasonable overall inflationary situation in which prices of importable commodities would go up and prices of other commodities will not go up or could even go down a little bit.
So I don't think the fact that the exchange rate has weakened necessarily leads to unraveling of macro economic balance. Look at the exchange rate itself not vis-à-vis the dollar but vis-à-vis six major currencies. If you compare 2004 with the latest position on the exchange rate and you compute what is called the real effective exchange rate of the economy which takes into account differential movements in prices. If your inflation is 2 percent higher then in order to remain competitive you need to depreciate by 2 percent in the year. If you look at it from that point of view then the exchange rate today is only marginally depreciated in real terms compared to 2004. In 2004 we had a balance from the current account and in excess of flows whereas today we have a deficit on the current account. So I wouldn’t say therefore that the present exchange rate is massively in a wrong position. It could correct itself, depends on what happens to market expectations but these are relatively narrow variations which you should expect. Nobody should be judged by whether the rupee remains absolutely stable vis-à-vis the dollar or even vis-à-vis 5-6 currencies.
Let us face it we are in a global market where the situation changes, competitiveness changes and therefore you expect currencies to bounce around. So the people who are in the market have to recognise that you are going to have these variations and they deal with it by hedging in forward markets which is allowed. It does make life a little more difficult but there is no alternative if you are working with a volatile global situation where most currencies are flexible. Q: The global liquidity issue is the one which is quite vexing because over the last few quarters while India's CAD was a problem. We had very abundant global flows because of QE and at least our deficit was getting funded. Now this deficit might diminish but will not go away in the next few quarters. It will still remain very high by even our historic standards. But if global liquidity were to start tightening as the signs are emanating from the West over the last few days, do you think we will have a problem of financing it unlike what we have had over the last four quarters?
A: I think we would have to be nimble in our financing strategy and there is a difference between the total amount of financing we can attract and the composition of financing. Now we have known for some time that the difficulties of the banks in the Eurozone were going to mean that European banks are going to contract. However on the other hand Japanese Banks are likely to expand. So we are in a position where you could either have a big increase in liquidity from Europe and Japan offset by or reduction in liquidity in the US.
When that happens there will be some changes in flows but remember we are not looking for short-term flows, we are looking for longer term FDI flows and actually even longer term FII flows from institutions like pension funds etc where they are not trying to make money on the short-term.
 
From that point of view, if India is seen as having got back to a 6-7 percent growth rate within a year or so, then as this liquidity tightening takes place, the flow of capital to a fast growing economy which is open should remain very positive. If you look around the world and if you are a pension fund manager and you have lots of resources to deploy what would you be looking for? You would be looking for a country that has good macro management and high growth potential. I think India qualifies under that criterion. So don't get too worried about what happens in the next month or next week. We have to live with short-term volatility; we can deal with that, leave it to the RBI to decide that. Long term next two-three years we need to bring in more money and that money has to be brought in on the strength of a growing and FDI welcoming economy.
By the end of the 12th Plan we think that we will be able to reduce the CAD down to around 2.5 percent GDP and that would be a comfortable level. So what we have got is an immediate short-term problem because of global volatility, a two year problem of dealing with a somewhat higher than normal CAD and then we are back to comfort levels. In these two years what we have got to do is to persuade people that the India growth story is very much there and the notion that the Indian economy is stuck which did come up last year and is being exaggerated by our own media is not actually valid. Remember India grew at 5 percent when the Eurozone had negative growth. So the fact of the matter is everybody has slowed down, even China slowed down. These are tough times and there are no simple solutions but I think the Indian economic opportunity has not actually disappeared.