'Re expected to stay at current levels'

Prime Minister’s Economic Advisory Council Chairman C Rangarajan on Wednesday said he expected the rupee to stay at current levels on hopes that capital inflows would pick up in the second half of the current financial year.

“The rupee starts depreciating only when capital flows are not adequate to finance the current account deficit. That is what happened in 2011-12. Now, I expect the capital flows will pick up and cover the current account deficit, leading to exchange rate to be at current levels,” said Rangarajan on the sidelines of a seminar here.

After touching an all-time low of 57.16 per dollar in June, the rupee has appreciated by about 9 per cent since then. On Wednesday, the rupee closed at 52.17 against the dollar, up by 23 paise compared to the previous close.

Rangarajan said policy makers should also ensure that the rupee does not appreciate in real terms. “Normally, the currency of a country continually in current account deficit depreciates. But what prevents this from happening is the capital flows. That is why policy actions are needed to prevent the currency from appreciating in real terms,” said Rangarajan.

He said the current account deficit should be reduced to 2.3 per cent over the next five years.

He added India would need to attract net capital inflows of $50-70 billion in order to sustain the current account deficit to 2.3 per cent of GDP. He said attracting capital flows was the short term necessity while accelerating exports, reducing import growth and overall trade deficit are the medium and long term solutions to contain current account deficit.

He said the government should limit subsidies to reasonable levels and work towards bringing it down from 2.4 per cent of GDP to 1.7 per cent over the next several years.

He was speaking at an event organised by the Export Credit Guarantee Corporation of India.

In terms of the timing of monetary easing, Rangarajan said the Reserve Bank of India (RBI) would be in a position to change its policy only if the inflation rate showed definite signs of decline.

The RBI is scheduled to announce the second quarter monetary policy review on October 30, 2012. The central bank had reduced the cash reserve ratio by 25bps keeping policy rates intact in the mid-quarter monetary policy review held in September.