Govt may tap overseas Indians to plug CAD gap, says FinMin official

The RBI is intervening in the market when needed, says the official

The government, for the first time since the rupee started plummeting against the dollar, admitted that it was worried about the situation and was in constant touch with the Reserve Bank of India on the matter.

A senior finance ministry official, who did not wish to be named, said the central bank has many options which can be utilized if need be, including a swap window for FCNR(B), similar to the one used during 2013 to deal with the fall in rupee.

 He said that there was no need to panic over the rupee's decline against the dollar. "The government is vigilant on the depreciation of the rupee. We are in regular touch with the RBI,” the person said.

The official said the RBI is intervening in the market when needed. "There is a wrong impression in the market that the government is not concerned about the rupee," the official added. The RBI has been selling dollars to prop up the rupee albeit leading to a drop in India’s foreign exchange reserves to $400 billion from a record high of $426 billion in mid-April.

The official said that the country’s forex position was comfortable and authorities could take measures such as tapping overseas Indians through FCNR(B) and other moves to plug the current account gap. Meanwhile, the rupee, on Monday, crashed below the 72-mark to end at a life-low of 72.45 against the US dollar on growing fears of contagion from an emerging-market rout and escalation of global trade war. 

Heavy speculative dollar demand along with panic among importers sent the domestic currency tumbling by a sharp 94 paise to hit a historic low of 72.67 in mid-morning trade, triggering the central bank intervention to defend the currency.

In August 2013, the rupee had touched the then low of 68.85 against the dollar. In a bid to bring stability to the fluctuating exchange rate, the RBI had introduced a swap deal in September 2013 aimed at encouraging banks to raise money through foreign currency non-resident (FCNR) bonds for a substantial dollar inflow.

The RBI had originally expected to raise $10 billion but eventually raised over $30 billion under the scheme. The banks had swapped the dollars at a subsidised rate of 3.5 per cent with the RBI. During an event in 2016, former RBI Governor Raghuram Rajan had termed raising foreign currency through FCNR bonds as "one of the worst ideas on the table" during that time but in hindsight it turned out to be a “brilliant idea.”