Can finance CAD without dipping much into reserves: Raghuram Rajan

MUMBAI: The Reserve Bank of India governor Raghuram Rajan said the central bank will be able to finance the country’s current account deficit (CAD) this fiscal without substantially running down its foreign exchange reserves.

More than $1.4 billion have flowed into the foreign exchange kitty of RBI since September 4 when it introduced new measures to boost deposits and borrowings by banks. This, however, may not be enough to feed the current account deficit, which touched a record 4.8% of gross domestic product in the year to March.

“We are fairly confident that we can finance this year’s current account deficit without substantial drawdown into reserves,” Rajan said on Friday. “The finance minister’s math, which RBI collaborated on, suggests that CAD could come down to $70 billion and even below, and the financing measures that we have put in place should bring in more than that amount of money.”

India has received $466 million through Foreign Currency and Non-Resident (Banks), or FCNR (B), deposits and $917 million through the swap facility, taking the total foreign exchange inflows to nearly $1.4 billion.
On September 4, the RBI doubled overseas borrowing limits of banks to 100% of their tier-1 capital from 50% at a concessional swap rate. RBI offered a special swap window to banks for FCNR (B) deposits under a swap agreement at a fixed 3.5% for three years.

These steps are expected to attract $30 billion of inflows in the three months to November 30.

C Rangarajan, chairman of the Prime Ministry’s Economic Advisory Council, has said that India may have to draw about $9 billion from foreign exchange reserves this year to finance its current account deficit, which is the difference between exports and imports. “Controlling CAD remains the main concern at present... On the assumption that total CAD will be $70 billion and the net capital inflows that we have estimated (about $61 billion), there will be a draw down on the reserves of about $9 billion,” Rajan had said.

Last year, the current account deficit was financed without dipping at all into the reserves.