Mumbai: Painting an optimistic picture on the external front, the Reserve Bank has said the country is ready for the US Federal Reserve's tapering, and has pegged the current account deficit at below 3 per cent for this fiscal in its eighth Financial Stability Report.
"External sector risks have been considerably reduced and the effect of the tapering on the economy is expected to be limited and short-lived," the report released today said.
Delay in the tapering of the USD 85 billion-a-month bond buyback programme by the US Fed (tapering will start from January 1) gave the country time to replenish the forex reserves and rein in the high current account gap.
In the third week of December, the US Fed announced that it would cut back bond buying by USD 10 billion a month to USD 75 billion from January on the back of improvement in the world's biggest economy.
"The CAD is expected to be less than 3 per cent of the GDP during the current financial year," the RBI said in the half-yearly report. "On balance, the country's external position appears to be manageable and reserves seem adequate."
CAD shot up to an all-time high of 4.8 pc last year on account of a heavy trade deficit and higher gold imports. The high CAD, along with fears of tapering, was one of the reasons for the rupee touching a lifetime low of 68.85 against the dollar on August 28 this year. The rupee improved since then, but is still 14 per cent lower year-to-date.
The authorities acted on multiple fronts, curbing gold imports, opening currency swap windows to get fresh dollar flows, and increasing money market rates to reduce speculation.
All of these resulted in the CAD coming down to 1.2 per cent of GDP in Q2 and the exchange reserves rallying for six weeks till mid December at over USD 295 billion as of last week.
Exactly six days after Raghuram Rajan took charge as the RBI governor, the rupee on September 10 traded off the day’s high at 63.84 gaining 2.14 pc against Sept 6 close at 65.24 per dollar. While the BSE Sensex closed up 727 points, the Nifty gained 3.69 pc, biggest single-day gain since May 2009. Among many reasons for Re recovery in the past one week, Rajan's agenda for growth could be one.
In fact, Raghuram Rajan struck the right chord on his first day in office on September 4, 2013. His advocacy for transparency and stability left a positive mark on not just markets, but India as a whole. The rupee and Sensex gained in the wake of his plans for growth. DC Online lists out his agenda. The RBI will encourage qualifying foreign banks to move to a wholly owned subsidiary structure, where they will enjoy near national treatment on a reciprocal basis. To make payments anywhere anytime a reality, national giro-based Indian Bill Payment System will be implemented such that households will be able to use bank accounts to pay school fees utilities, medical bills, and make person to person transfers electronically. Plans are on to set up a Technical Committee to examine the feasibility of using encrypted SMS-based funds transfer using an application that can run on any type of handset. Cooperation will be sought from banks and mobile companies in rolling out mobile payments. The RBI will completely free bank branching for domestic scheduled commercial banks in every part of the country. No longer will a well-run scheduled domestic commercial bank have to approach the RBI for permission to open a branch. Rajan will facilitate mini ATMs by non-bank entities to cover the country so as to improve access to financial services in rural and remote areas. Households will be protected against CPI inflation and RBI will issue Inflation Indexed Savings Certificates linked to the CPI New Index to retail investors by end- November 2013. Currently holders of pre-paid instruments issued by non-bank entities are not allowed to withdraw cash from the outstanding balances in their pre-paid cards or electronic wallets. Plans to enable cash payments using Aadhaar like identification. Small and medium firms to get Electronic Bill Factoring Exchanges, whereby MSME bills against large companies can be accepted electronically and auctioned so that MSMEs are paid promptly. RBI has proposed to collect credit data and examine large common exposures across banks. This will enable the creation of a central repository on large credits, which can be shared with the banks. This will enable banks themselves to be aware of building leverage and common exposures.A committee headed by former RBI governor Bimal Jalan to look into the RBI issuing new bank licences with highest standards of transparency and diligence. Licences likely to be announced in January 2014.To allow exporters to re-book cancelled forward currency contracts up to 50 pc of the value of cancelled contracts and up to 25 pc for importers. The RBI to help banks bring in safe money to fund current account deficit. To offer special window for swapping foreign currency non-resident deposits with a minimum tenor of three years and more, at a fixed rate of 3.5 pc per year. Plans on to raise overseas borrowing limit of 50 pc of unimpaired Tier I capital to 100 pc for banks. Borrowings mobilized under this provision can be swapped with RBI at a concessional rate of 100 basis points below the ongoing swap rate prevailing in the market.As access to finance is still hard for the poor, and for rural and small and medium industries, RBI plans faster, broad based, inclusive growth leading to a rapid fall in poverty.Indian public to benefit from more competition between banks, and banks would benefit from more freedom in decision making. To check out the possibility of converting large urban co-operative banks into commercial banks.Presently, exporters are permitted to re-book cancelled forward exchange contracts to the extent of 25 per cent of the value of cancelled contracts. To enable exporters/importers greater flexibility the RBI will enhance the limit available to exporters to 50 per cent and allow a similar facility to importers to the extent of 25 per cent. 
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