The current account deficit has been above sustainable levels for the last three years. The rupee should have depreciated because of high CAD. In other words, depreciation was programmed into the rupee, said RBI governor D Subbarao.
MUMBAI: Addressing his 20th monetary policy review which marked the end of his five-year term, Reserve Bank of India governor D Subbarao left foreign exchange markets in a tizzy by stating that he did not favour a sovereign bond issue and that RBI will not stand in the way of a falling rupee except to curb volatility. The absence of the any further measures to protect the domestic currency and lower growth forecasts also increased pressure on the local currency which fell by more than a rupee on Monday. In what is probably his last monetary policy, Subbarao provided his take on economic issues facing the country...
On sovereign bond & approaching IMF: We have reservations on this. Despite perceived benefits of boosting reserves, lowering interest costs and broadening its investor base, there are costs to a sovereign issue. It will compromise our financial stability. There is a lot of value to government's borrowing in domestic market. Also, will we really get a lower interest rate on a sovereign bond especially if investors factor in the exchange rate variation. In RBI's view, the cost of a sovereign bond issue outweighs the benefits. We should do a sovereign bond from a position of strength when we are much less vulnerable. I don't believe that we are in a situation where we will have to go to the International Monetary Fund. We are fairly resilient.
On rupee: The current account deficit has been above sustainable levels for the last three years. The rupee should have depreciated because of high CAD. In other words, depreciation was programmed into the rupee. But that did not happen because we were able to finance the CAD because of the extraordinary liquidity in global markets. This made us vulnerable to global financial markets and the sudden stop and reversal of capital flows and subsequent destabilization of exchange rate. The only uncertainty was when it would happen and that has happened sooner than everyone expected. There was 5.8% depreciation from May 22 — the day of the first announcement of the Fed — to July 26. On top of the rupee movement, there was comfortable liquidity in the system which provided a fertile ground for speculation and exacerbated vulnerability. The first line of defence against volatility is monetary policy and that is what we did.
On sovereign bond & approaching IMF: We have reservations on this. Despite perceived benefits of boosting reserves, lowering interest costs and broadening its investor base, there are costs to a sovereign issue. It will compromise our financial stability. There is a lot of value to government's borrowing in domestic market. Also, will we really get a lower interest rate on a sovereign bond especially if investors factor in the exchange rate variation. In RBI's view, the cost of a sovereign bond issue outweighs the benefits. We should do a sovereign bond from a position of strength when we are much less vulnerable. I don't believe that we are in a situation where we will have to go to the International Monetary Fund. We are fairly resilient.
On rupee: The current account deficit has been above sustainable levels for the last three years. The rupee should have depreciated because of high CAD. In other words, depreciation was programmed into the rupee. But that did not happen because we were able to finance the CAD because of the extraordinary liquidity in global markets. This made us vulnerable to global financial markets and the sudden stop and reversal of capital flows and subsequent destabilization of exchange rate. The only uncertainty was when it would happen and that has happened sooner than everyone expected. There was 5.8% depreciation from May 22 — the day of the first announcement of the Fed — to July 26. On top of the rupee movement, there was comfortable liquidity in the system which provided a fertile ground for speculation and exacerbated vulnerability. The first line of defence against volatility is monetary policy and that is what we did.
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