Even as the rupee closed at all-time low of 53.96 against the dollar today, Dr C. Rangajaran, Chairman, Prime Minister's Economic Advisory Council, suggested use of foreign exchange reserves to arrest the slide if temporary capital flow disruptions are perceived as the main cause for the currency's sharp fall.
The rupee has lost about eight per cent since March beginning. Monday's fall, according to forex dealers, was due to the intense dollar demand from banks and importers, mainly oil refiners.
At a PHDCCI event here on Monday, Dr Rangajaran, without committing himself to any comfort level for the rupee, said it was for the Reserve Bank of India to say what the main reasons were for the sharp fall.
“If the assessment is that the rupee's depreciation is being caused by temporary fluctuations of capital flows, reserves must be used to see that impact is not felt on the rupee,” he said.
Admitting that forex reserves were dwindling, Dr Rangarajan at the same time pointed out that they were not coming down at a fast rate.
Tackle slide
Dr Rangarajan's remarks are significant as policy measures to stem the rupee's weakness have picked up, along with the RBI's intervention in the currency market.
To tackle the rupee's slide, the RBI recently directed exporters to convert 50 per cent of the foreign currency holdings in their exchange earners' foreign currency account into rupees within a fortnight.
The interest rate ceiling on FCNR (Banks) deposits has been raised to 200 basis points from 125 basis points over LIBOR for maturities of one year to less than three years and to 300 basis points for maturities of three-five years.
While these are token measures, several stronger steps are also being discussed among policymakers, including introduction of special scheme to encourage non-resident Indian (NRI) deposits and steps to lower the open interest limit on currency futures.
Dr Rangarajan indicated that the main reason for the rupee's sharp fall was the increase in current account deficit.
The PMEAC expects the current account deficit (as a percentage of GDP) to be lower in 2012-13 compared with the estimated record level of 4.3 per cent of GDP in 2011-12.