July 19 (Bloomberg) -- The volatility in the Indian rupee is the “immediate cause of worry” as the government seeks to revive economic growth from the slowest pace in a decade, Prime Minister Manmohan Singh told businessmen today.
Listing the steps his government has already taken to curb the record current-account deficit, he said more measures to lure foreign direct investment are on the anvil and told investors not to be overwhelmed by “negative sentiments” about Asia’s third-largest economy. He was speaking at an annual event of the Associated Chambers of Commerce and Industry of India, or Assocham, in New Delhi.
“The most immediate cause of worry is the recent volatility in foreign-exchange markets,” he said. “I agree that we’ve had one bad year, but I assure you that we will get out of it.”
Singh, serving the final year of his second consecutive term, is struggling to stop outflows amid concerns that a potential tapering of stimulus by the U.S. Federal Reserve will accelerate money leaving emerging markets. His government this week proposed to ease FDI limits in some industries as part of efforts to woo long-term capital after the local currency touched an unprecedented low against the dollar on July 8.
The rupee has tumbled 8 percent this year, the worst performance in Asia after the yen, prompting the Reserve Bank of India to intervene by selling dollars and most recently this week to tighten liquidity in the local banking system by raising two interest rates.
The weakening currency has stoked concerns inflation will accelerate and force Governor Duvvuri Subbarao to desist from cutting the benchmark interest rate after three reductions of quarter-percentage points each this year.
“The RBI has done its bit to stabilize market expectations,” Singh said. “Initially it injected dollars into the market, this helped to some extent. More recently, it took additional steps to raise short-term interest rates.”
The rupee has recovered 2.3 percent from the record-low 61.2125 a dollar, and traded at 59.81 as of 11:50 a.m. in Mumbai today. The yield on the 10-year government bond rose 5 basis points, or 0.05 percentage point, to 8.04 percent, while the benchmark S&P BSE Sensex index gained 0.3 percent.
One-month implied volatility, a measure of expected moves in the exchange rate used to price options, touched 13.55 percent on July 8, the highest level since May 2012. The rate has since fallen to 12.44 percent after the central bank steps.
“Volatility will most likely continue to decline in response to the recent measures,” analysts at Deutsche Bank AG, including Singapore-based Taimur Baig, wrote in a research report today. “Depreciation pressure on the exchange rate would however abate only when capital flows stabilize and the trade deficit begins to ease.”
Currency depreciation is unraveling Singh’s decision to cut fuel subsidies as India pays for crude oil imports, he said. The rupee’s slump and a 6 percent rally in Brent crude since May have increased the subsidy bill.
Indian Oil Corp., the nation’s biggest refiner, and its state-run rivals sell diesel, kerosene and cooking gas below cost to help curb inflation. They are partly compensated by the government in cash and producers including Oil & Natural Gas Corp. and Oil India Ltd. give discounts on crude they sell to the refiners.
The government in January allowed the refiners to raise diesel prices by half a rupee a liter every month until they are pegged to market rates to recover full cost.
Indian Oil has raised diesel prices at least six times since then, according to its website. Revenue losses on diesel sale at Indian Oil and its state-run rivals has widened to 9.45 rupees a liter from 3.80 rupees on May 1, according to oil ministry data.
Singh began a series of policy changes in September to spur expansion and avert a credit-rating downgrade to junk. The steps have included liberalization of foreign investment limits in the retail and aviation industries, faster approvals for public works, lower levies on overseas buyers of local bonds and higher taxes on gold imports.
Singh’s policy push had foundered as protests over alleged graft in government disrupted parliament, impeding bills seeking to allow overseas companies to invest in the pensions industry for the first time, and hold as much as 49 percent of insurance businesses.
Foreign-direct investment slid about 21 percent to $36.9 billion last fiscal year compared with 2011-12.
The current-account deficit widened to $31.8 billion in the last quarter of 2012, or equivalent to about 6.7 percent of gross domestic product, before narrowing to $18.2 billion in the following three months. The nation’s goods exports declined in May and June from a year earlier.
“We need to push our exports and the depreciation in the rupee will help but of course there is a time lag before this benefit will felt in export volume,” Singh said.