India Dispatch: The Indian government's announcement of a wave of measures designed to boost the fragile Indian rupee gave it little support yesterday, as markets remain sceptical about the currency.
India's new measures fail to lift rupee
The Indian government's announcement of a wave of measures designed to boost the fragile Indian rupee gave it little support yesterday as markets remained sceptical about the currency.
The finance minister, P Chidambaram, on Monday revealed plans to increase flows of foreign capital in the country and reduce import spend to narrow the country's gaping current account deficit.
These included liberalising rules for non-resident Indian's deposits, reducing gold imports, lowering spending on oil imports and allocating tax-free bonds for sovereign wealth funds.
Full details of all the measures were not provided, but more information began to emerge yesterday with the finance ministry announcing an increase in the import duty on gold to 10 per cent from 8 per cent.
The Indian rupee tumbled to a record low of 61.8 against the US dollar last week and has fallen by about 12 per cent since May.
The rupee yesterday was trading close to those lows and strengthened just marginally in the afternoon to around 61 against the dollar.
"Since the world economy is challenged, India's economy also faces challenges," said Mr Chidambaram.
"One of the main challenges is the current account deficit [CAD]. Investors and analysts have raised concerns about the CAD.
"Their concerns are reflected in the pressure on the exchange rate.
"The[central bank] 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.
However, we believe that we have to do more to contain the CAD, to reduce volatility in the currency market and to stabilise the rupee."
Other measures include reducing the import of non-essential items, such as televisions.
Steps have also been taken to reduce imports of silver, with the government yesterday hiking the duty on the metal to 10 per cent from 6 per cent.
The finance ministry expects that the measure can help to contain the deficit at US$70 billion in the current financial year, which would amount to 3.7 per cent of GDP compared with 4.8 per cent in the last fiscal year.
Analysts pointed out that India needed much deeper structural reforms, such as investments in infrastructure, to make a sustained effect.
Gaurav Kashyap, the head of futures at Alpari ME, a global online currency and commodity broker, said that the Indian rupee remained "anaemic" despite the announcement.
The Reserve Bank of India last month took liquidity-tightening steps in an effort to boost the currency, which also failed to boost the rupee.
"Markets continue to test the resolve of the central bank and these Band-Aid solutions are not enough to change what is a deeply entrenched bearish sentiment for the currency," Mr Kashyap said.
"The numbers out of India continue to deteriorate amid a widening current account deficit. [Monday's] industrial output reading showed a larger than expected contraction in June, largely due to a sagging manufacturing sector and stubbornly high prices further complicate matters."
The rupee still has potential to slide further, he added.