On a day the rupee hit a new lifetime low, plunging below Rs 65 to the dollar, Finance Minister P. Chidambaram said pessimism about the economy was “excessive and unwarranted” and RBI Governor D. Subbarao was confident the central bank has enough foreign exchange reserves to deal with the declining currency and the widening current account deficit.
Although the Finance Minister admitted that growth remained flat in the first (April-June) quarter of the current fiscal, he said the Government’s measures to boost growth and investment will start showing results, and that growth would improve in the latter half of the year. He was addressing the media after a meeting with RBI Governor Duvvuri Subbarao.
“We believe that rupee is undervalued and has overshot what is generally believed to be a reasonable and appropriate level,” Chidambaram said. Earlier in the day, he held a three-hour long meeting with Subbarao and Governor-designate Raghuram Rajan.
The Finance Minister said the recent steps taken by the RBI to reduce volatility in forex market and quell speculation would be revisited. The rupee has depreciated nearly 5.5 per cent in five days. He clarified that measures taken by the RBI do not signal a return to the capital control regime.
PTI reports
Later, in a separate briefing, Subbarao said that as long as rupee is volatile, measures will be in place. “We will respond as and when required,” he said adding the country has forex reserves to meet the current situation.
Inflation link
Explaining the relationship between rupee depreciation and inflation, he said, “latest RBI analysis shows that the elasticity co-efficient has increased. Earlier we said that for every 10 per cent depreciation, inflation goes by one per cent… that co-efficient has increased since to 1.2 per cent and pass through as indicated in the annual report is incomplete.”
On why the market was 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.”
