The exchange rate of the rupee is susceptible to the influence of large capital movements, especially during crisis periods, in view of the large current account deficit, said a top central bank official.
A deficit in the Current Account arises when a country’s total imports of goods, services and transfers are greater than exports. During 2012-13, the CAD rose to $87.8 billion (4.8 per cent of GDP) as against $78.2 billion (4.2 per cent of GDP) during 2011-12.
A widening CAD exerts downward pressure on the rupee, making imports costlier. This is a cause of concern for the Government as costly crude oil imports have inflationary impact in the economy.
In his comments circulated at the Official Monetary and Financial Institutions Forum at Singapore on Friday, G. Padmanabhan, Executive Director, Reserve Bank of India, said: “The Indian financial markets are now increasingly getting integrated with global financial markets…..This is reflected in the increasing volatility in Indian financial markets as a result of spill over from turmoil emanating from international markets.”
Padmanabhan observed that, as witnessed in recent weeks, the rupee came under some pressure primarily on account of external developments.
Further, both equity and bond prices witnessed volatility because of global factors such as de-leveraging by Foreign Institutional Investors over fears of the impending winding up of quantitative easing (stimulus) by the US Fed.
Unfettered integration
On the issue of internationalisation of Asian currencies, especially the renminbi and the rupee, Padmanabhan said policymakers need to be conscious about the problems of unfettered integration with global markets.
This could lead to a situation where the local fundamentals recede to the background and the global factors start playing a major role in creating unwarranted volatility in the markets as the recent developments have amply demonstrated.
“How do we address this issue? India approached this issue (in) exactly the same way as the country has approached capital account convertibility — as a process rather than an event, by a gradual rather than the Big Bang opening of the door…,” said the RBI official.
The rupee has depreciated by almost 11 per cent since March-end till date. It has come under pressure due to widening CAD and strengthening of the dollar against major global currencies.
After closing at an all-time low of 60.76 to the dollar on June 26 and hitting an all-time intraday low of 61.19 on July 8, the Indian unit relatively strengthened to 59.60 on July 12.
Padmanabhan said: “India has generally been a current account deficit country…..This does not mean that the country does not aspire to see the rupee as an international currency particularly as we increase our global integration through trade and investment channels.”