'Enough ammo to deal with Fed stimulus tapering'

Allaying fears in certain sections of economists that withdrawal of stimulus in the US will spell a gloom on India in terms of depreciation in rupee and capital flight, the Finance Ministry on Monday said the country has enough ammunition to fight with the future tapering.

“I do believe that when tapering happens, there will be outflow of capital but the fact also remains that we have enough ammunition in our hand... And therefore, there is no room to be fearful of rupee taking a tanking,” Department of Economic Affairs Secretary Arvind Mayaram said here.

Mayaram said that India had close to $270 billion of foreign reserves with the RBI, around $40 billion additional inflow of capital this fiscal year, besides a $50 billion swap arrangement with Japan and $100 billion contingency fund signed by BRICS countries.

In June, Bernanke had announced that the US central bank’s $85 billion a month bond-buying programme would be cut back over the next year. But on Wednesday, Bernanke decided to keep the quantitative easing programme going at $85 billion a month despite widespread expectations that the Fed would take the first step towards “tapering” it down in September.

Analysts, however, feel that the withdrawal of tapering, whenever it happens, will spoil the party in emerging economies including India which have depended heavily on foreign flow to fund their current account deficit. On rupee, Mayaram said the intrinsic value of the currency is between 58 and 60 against the dollar.

“There is something called intrinsic value of rupee. The intrinsic value of rupee comes from its purchasing power. The intrinsic value of rupee in Real Effective Exchange Rate (REER) term could be somewhere between 58-60,” he said.

Mayaram expressed confidence that Foreign Direct Investment inflows into India in the current fiscal would be around $36 billion.

“This year, in the first quarter, the net FDI flow in the country has been $9 billion, which is 70 per cent higher than FDI inflow in the first quarter of the last fiscal. If that trend continues, then I have no doubt, FDI inflows in the country will be $36 billion,” he said.
He also said the government will be able to save around $1 billion as bulk diesel demand falls.