Rupee Dip Risks Economic Nosedive in India, Billionaire Says

India needs to immediately use its foreign exchange reserves to arrest the rupee’s record plunge as the weakening currency has the potential to send the economy into a “nosedive,” billionaire Adi Godrej said.

“The whole economy will suffer dramatically -- there will be huge inflation, which will lead to high interest costs and a whole vicious cycle will be created,” Godrej, chairman of the soaps-to-real estate Godrej group, said in a phone interview yesterday. “I’m very surprised that the government and the Reserve Bank of India are not intervening sufficiently to prevent the volatility.”

India’s rupee plummeted the most in two decades to a record yesterday as a surge in oil prices threatens to worsen a current account deficit and push the economy toward its biggest crisis since 1991. A continued drop in the rupee will stoke inflation, which is at a five-month high, in turn depressing consumer demand and raising costs for companies, according to Godrej.

The billionaire heads Godrej Consumer Products Ltd., which makes the Cinthol bath soap and Good Knight mosquito repellent, chemicals maker Godrej Industries Ltd. and a real estate developer. The Mumbai-based group, which started in 1897 as a maker of locks, has seven units with combined annual revenue of more than $3.3 billion, according to its website.

Food Bill

Godrej’s remarks come after Prime Minister Manmohan Singh’s government on Aug. 26 won approval from the lower house of parliament for a landmark bill that expands the world’s biggest food program. The plan involves spending about 1.25 trillion rupees ($18 billion) in subsidies each year, potentially worsening a fiscal gap.

Godrej Consumer fell 0.1 percent to 798.30 rupees in Mumbai trading as of 10:17 a.m., while Godrej Industries declined 1.8 percent to 225.05 rupees. The benchmark S&P BSE Sensex climbed 0.6 percent.

India’s budget and current-account deficits are responsible for the rupee’s slide, Finance Minister Palaniappan Chidambaram said on Aug. 27. The government is taking steps to contain the shortfall in the broadest measure of trade to within $70 billion in the year through March 2014, he said, compared with an unprecedented $87.8 billion in the previous 12 months.

The rupee slumped 3.9 percent to 68.8450 per dollar in Mumbai yesterday, the biggest drop since 1993, according to prices from local banks compiled by Bloomberg. In an effort to stem the currency’s decline by reducing spot demand, the central bank said yesterday it will sell dollars to the nation’s biggest state-run crude oil importers through a swap facility.

Rupee Rebounds

Following the central bank’s move, the rupee opened with the biggest gain in almost two years. The currency surged 2.1 percent to 67.42 per dollar as of 9:49 a.m. in Mumbai.

The rupee has lost more than 18 percent this year, and is headed for the worst annual loss since a balance of payments crisis in 1991 forced the nation to pawn gold to pay for imports.

Dabur India Ltd., the household goods maker, will consider raising prices of its products in the next few weeks as costs of raw materials such as palm oil and plastic packaging increase, Chief Executive Officer Sunil Duggal said in a telephone interview yesterday. The Ghaziabad, India-based company would also consider cutting its advertising expenses, he said.

Dabur shares rose 0.8 percent to 157.60 rupees as of 10:22 a.m. in Mumbai trading.

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