Chidambaram Vows Reforms to Aid Growth as Rupee Resumes Drop
India’s finance minister signaled more policy changes to revive economic growth and said steps are being taken to stabilize the nation’s currency as it resumed a slide near a record low.
“There is concern about the rupee,” Palaniappan Chidambaram said in a briefing in New Delhi today. “But I don’t think there is any reason for panic. We are concerned about the volatility and some steps are being taken to ensure there is no volatility. It’s quite possible the rupee will regain some of the losses it has suffered in the last few days.”
The economy is stronger than last year and government spending will help drive its expansion, said Chidambaram, who has spearheaded a nine-month policy push to counter the weakest Indian growth in a decade. The rupee, which plunged to a record low earlier this week, weakened as much as 1.3 percent to the dollar, reversing gains yesterday after Fitch Ratings boosted India’s sovereign credit outlook to stable from negative.
The finance minister said no decision has been taken yet on whether to generate capital inflows by selling bonds to Indians living overseas, a statement that may have weighed on the currency as officials try to fund a record current-account gap.
“While we were not expecting any big bang announcements from the FM today, even our meager expectations have not been met with Chidambaram offering only the hope of more reforms by end June,” said Priyanka Kishore, a strategist at Standard Chartered Plc in Mumbai.
The rupee depreciated 0.3 percent to 57.99 per dollar in Mumbai, according to data compiled by Bloomberg. It slid to an all-time low of 58.9850 on June 11 and is down 5.2 percent this year. The S&P BSE India Sensex index retreated 1.1 percent to 18,827.16, its lowest close since April 17. The yield on the benchmark 8.15 percent government bonds due June 2022 rose five basis points to 7.55 percent, according to the central bank’s trading system.
The current account deficit will be around 4 percent of the gross domestic product in the quarter ended March 31, Bloomberg TV India reported citing Raghuram Rajan, chief economic adviser in the finance ministry.
The Reserve Bank of India sold dollars to prevent the currency dropping to 60 per dollar, according to two people familiar with the matter, who asked not to be named as the information isn’t public.
Long-term investors, including sovereign-wealth funds, multilateral agencies and global central banks, can buy $5 billion more Indian sovereign debt, the central bank said in a statement yesterday as it tries to lure inflows. The cap now stands at $30 billion, compared with $25 billion earlier.
Chidambaram said a review of restrictions on foreign-direct investment will be “resolved” before the end of the month. He indicated that changes to coal and gas prices to better reflect market rates are due in June as well.
He also said the rupee’s decline will pressure inflation. Consumer prices rose 9.31 percent in May from a year earlier.
Reserve Bank Governor Duvvuri Subbarao will keep the repurchase rate at 7.25 percent on June 17, 12 of 22 analysts said in a Bloomberg News survey. The rest see a reduction to 7 percent. Subbarao lowered the benchmark in January, March and May by 25 basis points at each meeting.
Fitch’s revision provided some succor for Prime Minister Manmohan Singh’s coalition, which has been hurt by graft scandals that in recent weeks disrupted parliament and hampered efforts to extend the policy push for faster economic expansion.
The company said yesterday its move “reflects the measures taken by the government to contain the budget deficit” and “some, albeit limited, progress in addressing some of the structural impediments to investment and economic growth.”
Singh began reforms in September to woo investment and avert a rating downgrade. Steps have included liberalization in the retail and aviation industries to attract overseas capital, and a drive to speed up infrastructure projects.
The prime minister today established a group to monitor large public and private investment projects, according to a statement from his office.
The minority administration, whose economic credentials will be tested in elections due by May 2014, has also reduced levies on overseas buyers of local bonds and raised taxes on gold imports to pare the current-account shortfall.
Etihad Airways PJSC agreed in April to buy a 24 percent stake in Mumbai-based Jet Airways (India) Ltd. for 20.6 billion rupees ($355 million), taking advantage of reduced restrictions.
Still, the recent legislative logjam has held up bills to simplify taxes, provide more land for industry and open up the pensions and insurance business to foreign companies.
A proposal to provide the poor with cheap food grains is also stalled. Chidambaram said today the government is seeking the support of opposition parties to convene a special session of parliament to pass the bill.
The economy expanded 5 percent in the year ended March, the slowest pace since 2003, and less than the 10-year average of about 8 percent. The government today twice corrected industrial-production data released yesterday. Output rose 2.3 percent in April from a year earlier rather than the 2 percent originally reported.
“Walk the talk is the most critical thing and unless you address slow decision making and implementation, it’ll be difficult to get back to significant growth levels,” said Sujan Hajra, a Mumbai-based economist at Anand Rathi Financial Services Ltd.
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