FY14 current account gap seen at USD 56 bn, rupee safe: RBI

The RBI now expects the current account deficit (CAD) for this fiscal at USD 56 billion, compared to an earlier estimate of USD 70 billion, and much lower than the USD 88 billion for FY13.

While admitting that the shrinking of CAD had largely to do with restrictions on gold imports, Rajan also said that the increase in gold smuggling has been on a very low base, and as such was still small. 

He also said that concerns whether the CAD could be financed because a sharp increase in FII outflows were overdone.

“Last year, FII inflows, both debt and equity put together accounted for USD 26 billion.

Assume there are more outflows this year and outflows equal net inflows of last year. Remember though we have USD 32 billion of CAD less to finance this year.

Till yesterday, we had received around USD 18 billion through the new channels we had opened. So if other financing remains the same as it did last year, which it seems on track for, even if FIIs pull out more money than they have so far, we are still on course to break even on CAD flows,” Rajan said.

Also, Rajan said there no cause for alarm on FIIs pulling out more money from the debt market. That was because FII exposure to Indian debt has nearly halved to USD 19 billion from USD 37 billion in May this year.

Rajan expressed hope that the investors who have stayed on are the patient long term investors. Even otherwise, because of the reduced size of FII debt, outflows would not be a big worry. 

In August this year when the rupee was in a free fall, the RBI entered into an arrangement with oil marketing companies to sell dollars to them directly. This was done to ensure that the oil companies’ demand for dollars did not come to the market and put further pressure on the market.

Rajan said since October 14, oil marketing companies have been buying dollars from the open market, and much of the demand has already returned. He, however, did not specify how much.

“The market absorbed this additional demand quite smoothly; in fact the market did not even know about this demand till last week when a source in the Finance Ministry spoke,” Rajan said, evidently displeased at the official’s indiscretion.

The currency market has been volatile over the last few sessions, and Rajan said once it settled, the remaining demand of oil companies would be smoothly met. He said the RBI had no intention of rushing through that process.

As for the repayment of the dollars that oil companies had borrowed from RBI through the special swap window, Rajan said it would be done in phases between February to April next calendar.

If the currency market is volatile at that point, the repayment dates would be rolled over. The RBI would even consider settling the outstanding in rupees so that oil companies would not have to buy dollars from the market.

“There is no fundamental reason for the volatility in the value of the rupee. As an explanation, we are then left with fear about what others will fear and do. At such times, it pays to take a deep breath and examine the fundamentals,” Rajan said.