Exchange rate depreciation might not have a big impact on exports but it would still be worthwhile to carry on with the rupee’s current level and not let it appreciate further in real terms, Prime Minister’s Economic Advisory Council (PMEAC) chairman C Rangarajan said on Monday.
The rupee which gained 5-6% against the dollar in the past few weeks, depreciated for the second straight day on Monday to close at 53.01, against last Friday’s 52.81.
The former RBI governor’s comments in an interview to MK Venu for Rajya Sabha TV seems to be at divergence with the views expressed by finance minister P Chidambaram in Tokyo recently on the sides of the IMF-World Bank meeting.
Chidambaram reportedly said he would expect the rupee to rise a little more so as to ease the pressure on the central bank to bear the burden of containing inflation by itself. ?I don’t think exporters actually gain by the depreciation of rupee… a further rise in the rupee will help curb the increase in costs,? the minister said.
Chidambaram also made his preference for an interest rate cut, although without any specific reference to the upcoming policy review.
?Rates must come down and if the fiscal policy steps that we are taking encourage the central bank to take monetary policy action which will result in lower interest rates,? he said.
In the Rajya sabha TV interview, Rangarajan, however, sounded cautioning the RBI against opting for a rate cut. The second quarterly review of Monetary policy is due on October 30.
?The actual stance of the monetary policy (will have to) depend on the behaviour of inflation,? he said.
After the release of September inflation data on Monday (wholesale inflation unexpectedly spurted to a ten-month peak of 7.81% in the month against the previous month’s 7.55%), Rangarajan reiterated his stance, saying, ?circumstances are not too favourable ? for a rate cut?.
He, however, expected inflation to drop to 7% by the end of this fiscal.
When asked whether the rupee’s recent rise and the predicted further strengthening of the currency has now made a case for loosening of policy via rate cuts, Rangarajan was cautious. He said: ?? if despite the (high) current account deficit, the rupee is appreciating, it is because of (large) capital flows. If capital flows are large, I would argue that liquidity is also coming into system.?
With the trade deficit remaining high, the current level of exchange rate would be appropriate. Making his position further clear, Rangarajan said, ?I believe they (RBI) should take a call based on inflation numbers.?
Rangarajan said the discourse on monetary policy in the context of expansionary demand is very clear, but added that even when inflation is ascribed mostly to supply rigidity (as is the case now) there could be certain demand pressures coming into the system which need to be controlled. ?If some demand pressures are still seen, to that extent, the central bank has to act,? he said.
In such situations (where supply constraints are more visible than demand pressures), however, the monetary authority won’t need to be as aggressive as when demand pressures are very clearly seen, he said.
After the release of Monday’s inflation data, analysts opined the stickiness of core inflation has less to do with demand pressures.
Crisil said in a note: ?Persistently high core inflation over the last few months could be a result of a partial pass-through of higher imported input costs in a bid to alleviate pressure on profit margins, rather than rising demand-side pressures in the economy.?
The former RBI governor also said that some further executive action might have to be taken to prune expenditure.
?I believe through appropriate action on revenue and expenditure side, the finance minister will be able to contain fiscal deficit to as close as possible to the budgeted level (of 5.1%of GDP).?