Measures Taken By The Indian Government To Stem Rupee Fall

IndusView, Thursday 29 August 2013 (London): The Indian government is taking steps to stem the fall of the rupee, which has lost about 20% of its value this year.

The Indian government has approved infrastructure projects worth $28.4 billion to revive the economy and boost the falling rupee. Finance Minister P Chidambaram said 36 stalled projects in oil, gas, power, road and railways sectors were cleared.

The Reserve Bank of India (RBI) also unveiled plans to bolster the currency by lending dollars to state-backed oil groups. The central bank said it would use swap agreements to sell dollars to three companies, Indian Oil, Bharat Petroleum and Hindustan Petroleum, as part of a plan to fund oil imports.

A number of Indian banks have started increasing interest rates on non-resident Indian (NRI) fixed deposits with long-term maturities to attract foreign currency. Federal Bank, Axis Bank and IDBI Bank have joined Karnataka Bank and Dena Bank, who have already raised their rates for non-residence external (NRE) fixed deposits following the liberalisation of the same by the RBI.

“India’s secret weapon is its 25 million strong overseas diaspora who sent twice as much money into India last year than FDI and FII combined,” said Bundeep Singh Rangar, Chairman of London-based advisory firm IndusView. “$70 billion in annual remittances by Non-Resident Indians (NRIs) provides India with a distinct advantage over other BRIC economies, which is expected to increase to about $80 billion this year with the rupee depreciation.”

India’s dependence on foreign capital is also high and has risen sharply. The current-account deficit soared to almost 7% of GDP at the end of 2012, although it is expected to be 4% to 5% this year. External borrowing has not risen by much relative to GDP—the ratio stands at 21% today—but debt has become more short-term, and therefore riskier.

“A cheaper rupee will also encourage exports and discourage imports,” said Rangar. “If investment and exports begin to surge again, business confidence will return; that’s when the rupee will strengthen.”

           The rupee has lost about 20% of its value this year and is one of the world's worst performing currencies. India's currency has also been hurt by a range of other factors, not least the country's burgeoning current account deficit.

“The government needs to be more proactive,” added Rangar. “So far, all the actions taken have been to contain a crisis and not to prevent it”

India's current account deficit, which stood at 4.9% of the GDP in calendar year 2013, was the third highest in the world in terms of absolute numbers. At $98 billion, India's current account deficit in absolute numbers stood behind only the US ($473 billion) and the UK ($106 billion).

“A widening deficit not only puts a strain on the nation's foreign exchange reserves and but also indicates that it may need to borrow more money,” said Rangar. “That has triggered fears that India may not be able to trim its deficit.”

India imports almost 80% of its oil and there are concerns the higher prices will lead to higher inflation and a worsening of India's deficit.

The Wholesale Price Index, India's most closely watched inflation gauge, dropped to 4.7% in May on an annual basis, down nearly two-tenths of a percentage point from its 4.89% level in April. The broadly based wholesale price inflation reading, the lowest since late 2009, was well below market forecasts of a 4.9% rise.

A slowdown in India's growth rate - which has hit its lowest level in a decade - has also hurt investor confidence. International investors have withdrawn nearly $12 billion in shares and debt from India's markets since the beginning of June.

India's economic growth rate slipped to a decade low of 5% in 2012-2013 on account of poor performance of farm, manufacturing and mining sectors. It is projected to rise to 5.7% in the 2013 fiscal year and firm to 6.5% and 6.7% in 2014 and 2015, respectively.

Policymakers have consistently struggled to come up with steps that can convince markets they can stabilize the rupee and attract funds into the country despite extraordinary measures last month by the central bank to drain liquidity and action to curb gold imports and cut India's huge oil import bill.