Rajan eases rupee fears, pegs current account deficit at $56 billion

Reserve Bank governor Raghuram Rajan on Wednesday sought to allay investor fears that a sooner-than-expected tapering of stimulus in the US will lead to a re-run of rupee weakness.

There is no fundamental reason for volatility in the rupee, Dr Rajan said, adding that in such times it "makes sense to take a deep breath and examine fundamentals."

Dr Rajan said India's large current account deficit, which has been the single biggest reason for the sharp fall in the rupee, will be $56 billion or less than 3 per cent of India's GDP for the current fiscal. (Read: Highlights)

India's CAD stood at a whopping $88 billion in the previous fiscal and steps taken by the government and the central bank seem to have worked in managing the external worries.

The Indian rupee, which had hit a nine-week low earlier today, snapped a five-day losing streak to close higher at 63.30 per dollar.

The Reserve Bank of India (RBI) has allowed state-run oil companies to start purchasing dollars from markets but will not rush the process of tapering its dollars swap window to these companies, Dr Rajan said.

He added the RBI will choose the most appropriate solution to settling the dollar swaps with oil companies when the time comes.

The governor also cited the option of rolling over some portion of the oil company dollar swaps if market conditions are not stable.

The three state-run oil marketing firms require an estimated $350 million a day, accounting for the bulk of dollar demand in India's markets. The RBI had provided these companies with a special dollar swap window to borrow dollars as part of a package of measures to defend the rupee as it plunged to a record low in late August.

Dr Rajan also highlighted that food inflation remains "worryingly" high but said core consumer price inflation is heartening, and said the momentum for core CPI is downwards.

Dr Rajan announced that the RBI will pump in Rs 8,000 crore through open market operations on Monday after which the yield on the 10-year benchmark 7.16 per cent 2023 bonds fell sharply to below 9 per cent levels.

The rupee traded 0.42 per cent higher at 63.45 per dollar as of 4.10 p.m. and is on track to snap a five-session losing streak.

(With inputs from Reuters)