Rupee hits new low despite govt pledge
Mumbai, August 27, 2013
The Indian rupee hit a record low and shares slumped on Tuesday after parliament's approval of a $20 billion plan to provide cheap grain to the poor renewed doubts about the government's resolve to control spending ahead of elections due next year.
The partially convertible rupee slumped to a record low of 66.075 to the dollar, despite central bank intervention to ease the pace of the decline, surpassing its previous all-time low of 65.56 hit last Thursday.
Shares also slumped, sending the benchmark BSE index down more than 3 percent and benchmark 10-year bond yields up nearly 20 basis points.
The alarm over India's fiscal deficit eclipsed an announcement by Finance Minister P Chidambaram that the government had approved infrastructure projects worth 1.83 trillion rupees ($28.38 billion), a step aimed at reviving economic growth and shoring up investor confidence.
Instead, the rupee plumbed new depths after Chidambaram spoke and his promise that the government will meet its fiscal deficit target also failed to turn sentiment.
"I have already said that 4.8 percent of GDP and the absolute number that was indicated in the budget is a red line. The red line will not be breached," Chidambaram told a news conference. "I think we'll simply have to be patient, be firm, do whatever is required to be done, and the rupee will find its appropriate level."
Traders said the currency market is working in a climate of fear as repeated efforts by authorities to turn the markets around fail to have a holding impact.
The rupee has lost more than 16 percent against the dollar so far in 2013 - making it the worst performer by far among Asian emerging market currencies tracked by Reuters - despite frantic attempts by the government and central bank to support it and repeated comments by the finance minister that the rupee is oversold.
Indian markets have been caught in a downward spiral since May as the prospect for a tapering off in the Federal Reserve's period of cheap money has exposed India's vulnerability among emerging markets - marked by a record high current account deficit, a troubling fiscal deficit and the weakest economic growth in a decade.
Yet, despite measures to address these concerns, including a slew of steps to attract dollar inflows, Indian policymakers are struggling to instill confidence among investors.
"It's not out of choice, but out of compulsion that the finance minister is announcing so many things," said G Chokkalingam, managing director and chief investment officer of Centrum Wealth Management in Mumbai.
"The trinity of the fiscal deficit, slowing growth and an unstable currency is hitting us badly. In addition to these, the government has passed the food security bill which may put fear in the mind of rating agencies."
FISCAL INSECURITY
Worries are growing that Prime Minister Manmohan Singh's coalition government will be tempted into a populist spending splurge ahead of the general elections due by May and so will struggle to meet the fiscal deficit target.
The 1.35 trillion rupees ($20.94 billion) Food Security Bill is a key part of the ruling Congress party's strategy to win re-election, with its focus on selling subsidised wheat and rice to 67 percent of India's population of 1.2 billion.
Kotak Institutional Equities said there would be "no free lunch", estimating India's subsidy burden would reach 827 billion rupees from the budgeted 606 billion rupees.
"There are substantial challenges in procurement, logistics and identification of beneficiaries," the brokerage said in a note to clients. - Reuters
