Markets' apprehension misplaced, expect more steps to attract capital: FinMin

Last Updated: Wed, Aug 21, 2013 06:36 hrs

On a day when equity and currency markets witnessed sharp fluctuations, the finance ministry hinted at more measures to attract capital inflows. According to the ministry, the markets will realise soon that the knee-jerk reaction to US developments, as well as the apprehension that India won't be able to finance the current account deficit (CAD) without drawing down on forex reserves for this financial year, was futile.

The ministry exuded confidence on bettering the CAD figures, pegged at 3.7 per cent of gross domestic product for 2013-14 and, that the measures taken to attract foreign inflows would start yielding results in two to three months.

"We believe what is being seen in the last few days in the security and currency markets is a panic reaction to the external situation and fears that financial flows will reduce because of quantitative easing (QE) tapering (in the US), CAD is going to be very high and the government won't be able to finance it," economic affairs secretary Arvind Mayaram told investors on a conference call on Tuesday.

He said there was life before QE and foreign institutional investors (FIIs) were investing in debt and equity markets in India. "This sense of panic is completely unfounded and the financial markets will begin to see in a few days that it is unwarranted." The call was moderated by Rahul Arora, chief executive officer of Nirmal Bang Institutional Equities.

Mayaram wanted investors to base their judgements on fundamentals of the economy, which he said were quite strong. "India's real economy is much better off this year than in 2012-13. There should not be any apprehension on account of growth." India's economic growth plunged to a decade-low growth of five per cent in 2012-13 and Mayaram assured investors of the economy expanding by over 5.5 per cent in FY14. He said the investment cycle would come back in the current year itself.

Refusing to term the measures taken by the Reserve Bank of India (RBI) last Wednesday as capital controls, he said the government doesn't intend to bring capital curbs. "If need be, we will look at additional measures for capital flows into the country."

The government has pegged the CAD at $70 billion for 2013-14, down from $88 billion in 2012-13, or 3.7 per cent of GDP from 4.8 per cent.

"CAD will be $75 billion even if exports were not to increase beyond last year's level. We are determined not to allow CAD to go beyond 3.7 per cent of GDP this year and we may even give a surprise," Mayaram said.

The economic affairs secretary recognised that controlling CAD is more complicated than the fiscal deficit as the government does not have control over the former.

"India brought its fiscal deficit down more sharply and quickly than any other country, but managing CAD is more complicated because the government has less control over it," he added. The Centre's fiscal deficit declined to 4.9 per cent in 2012-13 against 5.7 per cent in 2011-12. The fiscal deficit is projected to come down further to 4.7 per cent of the GDP in the current financial year.

Ruling out sovereign or NRI bonds, he said the money to be raised from quasi-bond have to be channelised. "If you do sovereign bond or NRI bond today, it will create greater panic because that is not needed today... We must have adequate forex (flow) into the country. It doesn't matter where it comes from."

As RBI raised short-term rates a month ago to stabilise the rupee, Mayaram said the central bank will keep long-end interest rates low, while maintaining rates at the short-end high. "It will taper off purchases of cash management bills."

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