Business Current Affairs June 2013

Decline in the Value of Rupee

Following is the text of the Statement made by Dr. Raghuram G. Rajan, Chief Economic Adviser, Ministry of Finance in a Press Conference. “There has been some volatility in financial markets in the last few days. The Government, the RBI, and SEBI are watching market developments and each one will take actions as warranted. The exchange rate has depreciated about 5.5% since January 1, 2013 at par with Korea, Turkey and Brazil and much less than South Africa.
Clearly a large part of the decline in the value of the rupee in recent days is because of dollar strength. Emerging market currencies across the world have depreciated as debt outflows have increased, following the Fed’s suggestion that its asset purchases may be tapered down in September.

My understanding is that any tapering will be measured, but markets have reacted. The decline in the rupee of 7.5% since May 1, 2013 has been significant. However, this is only partly due to the debt outflows after the Fed’s remarks. I say partly, because despite the debt outflows, portfolio inflows between May 1 and June 10, 2013 have been significant. On net, India has received $4.162 billion in equity flows, and lost 486 million in debt outflows, for a net inflow of $3.675 billion. 

 The other reason for rupee weakening is that typically, the May 2013 Current Account Deficit (CAD) is larger because of seasonal factors. Add on top of that the increased gold purchases as gold prices dropped, and I think we have the main reasons for rupee weakness. Fortunately, some of these factors are reversing. Gold imports on the first 13 business days till May 20, 2013 averaged $135 million a day. However, in the 14 subsequent days till Friday of last week, they averaged only $36 million. Add to that the recent measures both the RBI and the Government have taken, and I think we should see a significant drop in gold imports for June, 2013. 

I should add that we are not contemplating any additional restrictive measures on gold and there is no reason for speculating on this basis. Oil prices remain low, and exports are picking-up. Also, some of the constraints on our exports of items like iron ore are alleviating, even while substitute imports such as scrap iron will abate. So there is good reason to believe that the process of narrowing of the Current Account Deficit (CAD) will continue over the next few months. 

One measure of the competitiveness of the Indian economy is the Real Effective Exchange Rate. If we calculate the six (6) country Real Effective Exchange Rate (REER) since 2004-05, a time when the current account was in balance, the REER is now below that value. To the extent that the REER in 2004-05 is a measure of the exchange rate consistent with balance, we have now crossed into territory where the exchange rate is undervalued. 

The Government continues to undertake measures to ensure the CAD is safely financed. We will continue to implement measures to ease foreign investor portfolio inflows and some will be done very shortly. In the coming weeks, we will be recommending the policies to enhance FDI limits in a number of areas. All this will help not just in the short term objective of financing the CAD but also in the longer term objective of ensuring sustainable growth

Did you know

1. Current account deficit of India touched a record high 6.7 percent of GDP in the December quarter.
2. Higher gold imports have been the key reason for the widening current account deficit.

This post contains the Indian business current affairs of June 2013. These are short business current affairs 2013 notes for quick review.
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