Asserting that recent curbs on dollar outflows should not be misconstrued as capital controls and pledging to revoke them as soon as the rupees stability is restored, Chidambaram called the current market panic unwarranted, resulting partly from a distorted reading of recent RBI measures.
On a day when the RBI said inflation could accelerate in the current financial year due to the rupees sharp depreciation and rating agency Fitch said the current slump in investor confidence, unless halted, could lead to negative rating action, the finance minister said GDP growth would likely pick up in the second to fourth quarters although might be subdued in the first quarter.
Among the short-term measures being planned is a likely reduction in export duty on iron ore, (currently 30% on both lumps and fines) a renewed plea to the Supreme Court to lift the ban on ore mining in Goa and steps to augment output and supply of coal, increasingly a strain on the current account. The economy, he said, would be aided by a 9% increase in sown area, enhanced Plan spending and projects cleared by the Cabinet Committee on Investment in the last few months. The finance minister expressed hope that merchandise exports would pick up in the second half of the fiscal, while net services exports and FDI were already doing well.
During the day, Chidambaram had a two-hour-long meeting with RBI governor D Subbarao, governor-designate Raghuram Rajan and economic affairs secretary Arvind Mayaram, and met Prime Minister Manmohan Singh to brief him about the economic situation. He expressed optimism that the FY14 current account deficit could be even lower than $70 billion estimated earlier, and this would be financed more than comfortably.
We believe the rupee is under-valued and has overshot what is generally believed to be a reasonable and appropriate level, Chidambaram said, but stuck to the position that the government wont ascribe the currency a value.
Addressing the media separately, Subbarao also reiterated that what the current situation demanded were structural measures which, by definition, might take time to give the desired results. In the meantime, we need adjustment or stabilisation measures. That is what we have been doing over the last three months, especially in the last one month, the governor said.
Defending the policy of keeping interest rates at the short-end firm to reduce volatility, Subbarao said rates at the long-end needed to be lower to induce growth. That was the stated objective of our carefully drafted measures on Wednesday. (These) will have an impact soon, he said. Contending that the movements of rupee on Wednesday and Thursday were part of the global trend (read the emerging markets falling out of favour of investors expecting a tapering of the US stimulus), Subbarao said there were tidal forces that were acting on currencies of emerging economies.
The RBI governor, with Rajan on his side, said that to reduce the CAD to a sustainable level, it was imperative to increase domestic savings. That (promoting savings) is one of the struggles for the RBI in calibrating the monetary policy. With one policy tool, the repo rate, we want to drive the twin objectives of keeping lending rates competitive, while also offering attractive deposit rates to savers. It is very important that we focus on this aspect as part of structural measures, Subbarao said.
On August 14, the RBI notified measures to curb capital outflows. It capped remittance by resident individuals at $75,000, banned investments by Indian residents in real estate abroad, deregulated interest rates on NRI deposits and restricted Indian companies overseas direct investment to 100% of their net worth. On Tuesday, it announced a raft of steps including open market operations to buy gilts worth Rs 8,000 crore on August 23, scaling down of sale of cash management bills and easing of rules on held-to-maturity of bonds.