Enough arsenal with RBI to contain rupee volatility

Updated: Jul 31 2013, 20:17pm hrs
RBI has arsenal to curb volatility in the rupee and take more measures to defend the currency if required, RBI governor D Subbarao said. The central bank, however, has reservations about issuing sovereign bonds, since it believes the costs outweigh the benefits. Excerpts from the post-monetary policy press conference:

Did it cross your mind to use a repo rate hike or CRR to prop up rupee

Yes, it did cross our mind about what other measures we could take. We didnt touch repo rate or CRR, and we decided that tightening liquidity by the measures that we adopted are the best prescription for containing rupee volatility. The idea was to make liquidity more costlier. So we determined that modulating access to LAF is the most efficient way of controlling volatility. And we determined that if we do this, it can be calibrated more flexibly or rather than resort to CRR or repo rate because there are other implications attached to those measures.

You said your first line of defence for rupee is monetary policy. What other measures do you have in mind and what are the structural steps you would like the government to take because structural measures may take effect

I want you to be assured that there is enough arsenal with the Reserve Bank to contain volatility in the exchange rate. As far as structural reforms are concerned, we asked for measures to contain the current account deficit, not so much to finance the CAD.

Of course that is an issue, on which both the government and the Reserve Bank are in consultation. Both of us are engaged in discussions. You are right that these measures cannot be taken overnight or even if measures are taken they will take a long time to give result. But I believe that government is taking measures to encourage exports and contain imports by some domestic policies, I think would be an important signal to contain the volatility of the exchange rate. What we have done is find some space for more durable adjustment and this space must be constructively used.

What is the formal view of RBI on sovereign bond

We have our reservations on that. We have done a cost-benefit analysis of the sovereign bond issue. There are perceived benefits of bond issue which is it will buffer your reserves, it will lower your interest rates, it will establish a benchmark for government borrowing and broaden the investor class.

Those are standard textbook arguments in favour of a sovereign bond issue. But there are costs. It will compromise our financial stability. There is a lot of value to be attached to governments borrowing from local financial markets. We have learnt that lesson during global financial crisis, we are learning it now.

Will we really get a lower interest rates on the sovereign bond issue, it is not clear when people factor in the exchange rate variation. The costs of a sovereign bond issue especially in the current juncture outweigh the benefits. We should be doing a sovereign bond issue if at all, from a position of strength.

The market has read your statement as dovish. Did you plan to sound dovish The rupee has slipped following the policy. Has the market read your message wrongly

We didnt start with that determination and fill in the language. We are not targeting a level (on the rupee) once again. So if the rupee is adjusting gradually, thats the way it should be. But I want to say that we remain committed to curtail volatility in the exchange rate. As far as the broader monetary policy stance is concerned, it is correct that we said that there would be reasonable argument for further easing because growth has moderated more than we thought and prognosis on inflation going forward is not as uncomfortable as before. That is the reason behind the language there that there would have been a case for easing but for the external sector concerns.