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Rajan Urges 'Deep Breath' To Calm Ruffled Market

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Reserve Bank of India (RBI) governor, Raghuram Rajan, expressed comfort on Wednesday, 13 November, about core inflation and highlighted the narrowing current account deficit as he sought to reassure investors worried the country would be hit hard in a global market sell-off.

Seeking to calm currency markets, the Reserve Bank said the current account deficit in 2013-14 will be $56 billion -- much lower than the quantum projected earlier -- and there is no fundamental reason for rupee depreciation.

"Our estimates now is that CAD this year will be $56 billion, less than 3 per cent of GDP and $32 billion less than last year.... Of course, some of that compression comes of our strong measures to curb gold import," RBI Governor Raghuram Rajan said at a hurriedly called press conference.

On interest rates, he said, the RBI would take a decision later taking into account various parameters. The RBI is scheduled to announce the next policy review on December 18.

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In the equities markets, the BSE Sensex fell for a seventh consecutive session to its lowest close in over a month as rate-sensitive stocks declined after higher-than-expected retail inflation data raised fears of a third rate hike this year.

Rajan expressed the hope that inflation would decline in the coming months once the impact of the good harvest was felt on the market.

Most immediately, he pledged to move slowly if needed in winding down an oil window that provides dollars directly to state-run oil companies, while announcing a bond purchase of Rs 8,000 crore on Monday (18 November) to inject liquidity in markets. Both had been key concerns in markets.

The news briefing, announced earlier in the day, was an unprecedented departure for the traditionally cautious central bank. Since taking the helm of the RBI in September, Rajan has pledged to be more communicative and has so far been warmly welcomed by investors.

Still, Rajan's remarks had a mixed impact on markets, sending benchmark 10-year bond prices rallying, although the rupee failed to gain much despite ending the day well above a two-month low hit earlier. Stock markets were already closed.

"It's important that the RBI clarifies interpretation of economic events and the likely direction of economic policies at times of uncertainty so that the market worries about the right things and does not get into a tizzy about the wrong ones. That is my quote today," Rajan told reporters.

"There is no fundamental reason for volatility in value of the rupee," he also said. "At some time, it makes sense to take a deep breath and examine the fundamentals. I hope you all will do that."

Rajan addressed reporters after stronger-than-expected U.S. jobs data last week had sparked concerns about an early end to the Federal Reserve's stimulus, hitting the rupee and sending Indian bonds and shares tumbling, although markets remain well above the levels of the summer lows.

Some investors had started to fear a repeat of the summer, when the rupee slumped to a record low of 68.85 to the dollar, punished by worries about the country's vulnerability should foreign investors sell because of Fed tapering.

Analysts also cited some comfort from the governor's remarks on inflation given the RBI has raised interest rates by a half percentage point since September in two back-to-back actions as it fights off rising consumer prices.

Worries about yet another rate hike had gripped investors after India reported late on Tuesday consumer price inflation accelerated more than expected to 10.09 per cent in October from 9.84 percent in September.

At his briefing, Rajan called food inflation "worryingly high", but said he was comforted by a downward trend in the core consumer price index.

"The RBI has attempted to calm the market by verbal intervention. On the policy front, it seems clear that the governor is in no hurry to hike the repo rate," said Upasna Bhardwaj, economist with ING Vysya Bank.

Rajan also surprised analysts by saying the RBI's estimate for the current account deficit for the fiscal year ending in March was $56 billion, the first time in recent memory the central bank has given such a forecast.

That puts the RBI's estimate in line with the government's after Finance Minister P. Chidambaram said this month the current account gap would reach $60 billion, well below its previous estimate of $70 billion.

India's current account had been a key source of stress during the summer sell-off, but has become less of a concern as the trade deficit has narrowed on government action to curb gold imports and to raise funds from abroad.

Rajan also sought to reassure investors worried about the rupee's stability after the RBI has allowed oil companies to source dollars directly in markets instead of a special window provided by the central bank.

That window was opened as an emergency measure by the RBI in late August and was cited as a key reason behind the recovery in the rupee, which is still up 8.8 percent since its record low in late August.

Rajan said the RBI had flexibility in managing the return of oil companies to markets, and would go slow if needed.

The rupee strengthened to 63.31 from its 63.71/72 close on Tuesday, while benchmark 10-year bond yields slumped 13 basis points to 8.92 percent, marking the biggest fall in five weeks.


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