India has adequate reserves and firepower to deal with the current volatility in rupee, Economic Affairs Secretary S C Garg said.
Stressing that the situation is better than 2013, he said basic source of rupee volatility is demand supply mismatch.
“If you expect oil prices to go up, then demand supply mismatch sharpens, it also affects the behaviour of some. If they expect rupee to depreciate, then FIIs tend to behave in a certain way, its all linked so it’s not isolated. We are not even certain what kind of a storm it is or even it is a storm or whether it will turn out to be a storm,” he said.
The rupee closed at an all-time low of 68.79 on Thursday due to multiple headwinds, including concerns over inflation and weak global cues. The currency recovered lost ground today to touch 68.36 in afternoon trade.
“We have adequate reserves, there is adequate firepower. The option of raising this (FCNR-B) always remains. If we assess at some stage that capital inflows are likely to be less than current account and remittance deficit (then we can do it). This balance will get upset if trade deficit goes up by USD 20-25 billion and remittances are not going to expand that much.
“Export Services are also going to expand that much. This USD 20-25 billion gap can be handled. If we assess at any stage that we need to buttress or refurbish our reserves, the options are open,” he said.
Following rupee touching previous record low of 68.85, 2013, the then RBI governor Raghuram Rajan introduced Foreign Currency Non-Resident Bank (FCNR-B) deposits under which USD 32 billion came to India for three years.
There is huge market demand for Indian offerings whether it is Foreign Currency Non-Resident Bank (FCNR-B), sovereign bonds or but the situation has not arisen, he said.
The volatility is not so sharp, not so big like you have seen it in other currencies also, he added.
On crude prices, he said fundamental supply demand imbalance was responsible for first spurt in oil prices.
“That was what was seen in first two and half months (of the fiscal year), when Russians and other OPEC countries decided to bring about certain increase in output, that volatility was addressed. Stability returned to the (oil) prices, prices have gone down to USD 70-72.
“Now the new factor of how these (Iran) sanctions will be implemented, if they succeed in implementing the sanctions, in the way they are saying, and Iranian crude does not come to the market, then again the demand mismatch emerges. That balance gets disturbed, and this is causing some concerns to operators, therefore there is some pressure on oil prices,” he said.
Until this uncertainty is also played out one way or the other, this is not the certain thing, he added.
Going back to 2013, he said, besides oil we had some other commodities (imports) of very high order.
“Gold, coal, our reserves position was much smaller, capital inflows were much less. This seems much better than that. Last year we had USD 45 billion of inflows in India. Today our receipts are much better than that. Last years FIIs brought USD 20 billion, this year they have taken USD 9 billion,” he said.
On possibility of rate hike, Garg said inflation situation is not worrisome at the moment.
“You have the facility of adjustment (of repo rate) every two months, and MPC will take an appropriate view. I do not see any need to increase rates,” he added.