New Delhi: The Reserve Bank on Thursday said it has adequate foreign exchange reserves to deal with the declining value of rupee and the widening current account deficit (CAD).
"I believe our forex reserves are adequate to manage current situation," RBI Governor D Subbarao said in a response to whether RBI has enough firepower to defend the rupee, which plunged to an all-time low of 65.56 today.
The country's foreign exchange reserves were up at USD 278.602 billion as of August 9 compared with USD 277.17 billion a week earlier.
After breaching the 65 mark, the rupee made some recovery to settle at a fresh closing level of 64.55, still down by 44 paise today against the US currency on persistent dollar demand from banks and importers and sustained capital outflows.
Subbarao also said the recent measures taken to curb volatility of rupee would continue till stability is restored.
"We have taken those measures again in order to curb volatility, in order to curb certain outflows, and we will revisit them as stability returns," he said, clarifying that "RBI does not take any position on the exchange rate, we are not targetting a level of exchange rate."
RBI took steps on July 15 and 23 to tighten liquidity.
These measures were taken to "raise cost of rupee resources at the short end which is in the arsenal of instruments available to central bank to defend against volatility in rupee," he said.
On financing CAD, Subbarao said: "They have to come from FDI, FII, equities flow, FII debt flows and I believe the government has given those numbers that is the joint and shared effort of the government and the RBI."
"Meanwhile, we have to be able to finance the CAD through stable and to the extent possible non-debt creating capital inflows. So that's the effort now."
What the current situation requires is structural measures, he said, adding, "We have structural CAD problem and that requires a structural response but structural measures by definition take time to play in and get the decisive results."
Meanwhile, he said, RBI has been focusing in the last three months especially in the last one month on undertaking stabilisation measures.
"We have to respond as and when necessary and we will continue to do so with the intention and the objective of curbing the volatility in the exchange rate," he said.
Explaining the relationship between rupee depreciation and inflation, the Governor said "latest RBI analysis shows that the elasticity co-efficient has increased, earlier we said that for every 10 percent depreciation inflation goes by one percent that co-efficient has increased since to 1.2 percent and pass through as indicated in the annual report is incomplete."
Asked on why market getting confused signals, he said: "I do admit that since the situation is changing, changing rapidly every day and changing for reasons beyond our control because of external developments because of the sentiments being shaped by what is happening outside the country."
"To some extent we are in reactive mode. As I said earlier sometimes we are anticipating developments, some time we are reacting to the some developments. That's inevitable in situation like this," he said.
"I believe it (measures taken to curb volatility) did have impact, it will have impact in due course but movement in the forex yesterday and today are because of global trends and tidal forces which are not acting only in the case of Indian rupee but of most emerging economies," Subbarao said.
On the withdrawal of liquidity tightening measures taken on July 15 and 23, he said as long as rupee continue to be volatile these measures will be in place. The RBI is in firm in its resolve that volatility in the rupee must be curbed.
"RBI commitment to curb volatility in exchange rate is total, we are committed to curbing volatility in exchange rate and we are firm in our resolve," he said.
"Day before yesterday we revisited those measures. In the context of transmission of rates from the short end to the long end, we determined that even as it is important to keep the short rates firm in order to reduce volatility.
"It is also necessary for growth concerns to reduce the rates at the long end was the objective behind our carefully crafted policy measures," he said.
Worried over a spike in interest rates in the wake of steps to support the falling rupee, the RBI on August 20 announced a slew of measures, including Rs 8,000 crore bond buyback, to ease liquidity and ensure adequate credit flow to the productive sectors of the economy.
In its bid to curb rupee volatility, RBI on July 15 put in place measures to restore stability in the foreign exchange market, including raising the Marginal Standing Facility and bank rates to 10.25 percent and restricting access by way of repos to Rs 75,000 crore.
The central bank also conducted open market sales of government securities of Rs 2,500 crore on July 18, the RBI review said.
As a contingency measure, the central bank opened a dedicated special repo window for a notified amount of Rs 25,000 crore for liquidity support to mutual funds that face redemption pressure.
On July 22, the RBI rationalised import of gold by making it incumbent on all nominated banks to ensure that at least one-fifth of the imported metal is exclusively made available for the purpose of exports.
A day later, the RBI directed banks to draw only 50 percent of their total deposits in overnight borrowings and maintain a 99 percent average cash reserve ratio everyday.