India plans curbs on some imports to pare a record current-account deficit and another push for capital inflows to stem the rupee’s slide, as a drop in factory output underscored the risks facing Asia’s No. 3 economy.
Imports of gold, silver and some non-essential items, as well as demand for crude oil, would be compressed under the plans, Finance Minister Palaniappan Chidambaram said in parliament in New Delhi today. Industrial production fell 2.2 percent in June from a year earlier, while consumer prices rose 9.64 percent year-on-year in July, government reports showed.
India raised two interest rates last month to fight the rupee’s 10 percent slump against the dollar in 2013. Emerging nations from Brazil to Indonesia have also boosted borrowing costs to defend their currencies, as the prospect of reduced Federal Reserve monetary stimulus saps demand for emerging-market assets. Chidambaram said state-owned financial companies would be allowed to issue “quasi-sovereign” bonds to woo funds.
India’s proposed measures “should help limit the rupee disruption,” said Prasanna Ananthasubramanian, an economist at ICICI Securities Primary Dealership Ltd. in Mumbai. “But, ultimately, it will depend up on what the U.S. Fed says in September and how global factors play out as a great deal of it is not in India’s hands.”
The rupee, which reached an all-time low on Aug. 6, weakened 0.7 percent to 61.275 per dollar at the close in Mumbai. The S&P BSE Sensex index rose 0.8 percent. The yield on the 7.16 percent government bond due May 2023 advanced to 8.30 percent from 8.13 percent on Aug. 8.
“The RBI has taken a number of measures to increase the interest rate at the short end and this has contained the depreciation of the rupee to some extent,” Chidambaram told lawmakers. “However, we believe that we have to do more to contain the current-account deficit to reduce the volatility in the currency market and to stabilize the rupee.”
State-owned financial companies would be permitted to issue “quasi-sovereign” bonds to finance long-term infrastructure investment, Chidambaram said. Rules governing overseas commercial borrowings and certain deposit programs for non-residents would be eased, he added. State oil businesses would raise funds from abroad, he also said.
The planned steps will contain the current-account gap at $70 billion, or 3.7 percent of gross domestic product, in the year ending March 2014, the finance minister said. The imbalance widened to an unprecedented 4.8 percent of GDP in 2012-2013.
“The government’s broad strategy throws up no surprises and is mildly disappointing, given the build-up of expectations,” said Sonal Varma, an economist at Nomura Holdings Inc. in Mumbai. “There is no detail on sustainably lowering the current-account deficit. The real issue still remains financing the deficit.”
India, the world’s largest buyer of gold, increased taxes on bullion imports in January and June to tackle the shortfall. The Reserve Bank estimates the sustainable level for the deficit is 2.5 percent of GDP.
Another report today showed the goods trade deficit was $12.3 billion July as exports rebounded and imports dipped.
The South Asian nation’s consumer inflation is the second fastest in the Group of 20 major economies, according to data compiled by Bloomberg. A gauge using wholesale prices quickened to a four-month high of 5 percent in July, the median estimate in a Bloomberg survey shows before an Aug. 14 report.
The economy may expand 5.5 percent in the year through March 2014, compared with a decade-low 5 percent in the previous 12-month period, the central bank estimates. Factory performance in May was revised to a 2.8 percent contraction.
The effort to stabilize the rupee risks hampering lending and blunting Prime Minister Manmohan Singh’s almost one-year-old drive to revive investment.
A moderation in domestic demand and exports has also curbed output of items such as automobiles. Local passenger vehicle sales in an industry that includes companies such as Maruti Suzuki India Ltd. fell 8.3 percent in July from a year earlier.
The government has eased caps on foreign-direct investment and loosened restrictions on inflows into the bond market since September, seeking to fund the current-account imbalance, spur growth and avert a credit-rating downgrade.
Incoming Reserve Bank Governor Raghuram Rajan helped to spearhead the effort as the top adviser in the Finance Ministry since 2012. A former International Monetary Fund chief economist, he takes over at the head of the RBI in September.
Rajan is in a tough spot as the recent “liquidity-tightening” steps will probably have to be kept in place for longer to support the rupee, suggesting “a bigger growth sacrifice” could be necessary, Leif Eskesen, chief economist for India and Southeast Asia at HSBC Holdings Plc in Singapore, wrote in a note.
To contact the editor responsible for this story: Stephanie Phang at email@example.com