India plans to unveil measures today to support the rupee as its slump to a record low against the dollar threatens to intensify price pressures and boost the cost to companies of repaying foreign debt.
The government and central bank will make the announcement, Finance Minister Pranab Mukherjee told reporters in Kolkata on June 24. The ruling Congress party’s nominee for president, Mukherjee told the Press Trust of India he will resign from his current post tomorrow. A group of federal and state legislators elects the next president July 19.
India’s currency is Asia’s worst performer of the past year, having tumbled 21 percent versus the dollar, and its decline has contributed to an inflation rate that the central bank deemed last week too high to allow an interest-rate cut. Chakravarthy Rangarajan, the prime minister’s top economic adviser, said last month one option to shore up the rupee was a deposit program to lure funds from citizens based overseas.
“The situation is quite worrisome,” Dharmakirti Joshi, Mumbai-based chief economist at Crisil Ltd., the local unit of Standard & Poor’s, said in an interview. “You have to increase the supply of dollars. A lot of foreign-currency convertible bonds and other payments are due and it does create stress on those who have borrowed abroad.”
Indian companies face a record $5.3 billion of maturing foreign-currency debt this year, data compiled by Bloomberg show. At the sovereign level, Fitch Ratings cut its outlook for India to negative on June 18, joining S&P in signaling the country is at risk of losing its investment-grade status.
The rupee reached an all-time low on June 22 of 57.3275 per dollar. While most emerging-market currencies have retreated in recent months as Europe’s crisis prompted investors to flee riskier assets, the rupee has underperformed as India’s government failed to rein in its budget deficit and economic reforms stalled. The currency slumped 2.9 percent last week, its biggest loss since September.
Joshi said that besides the deposit program, relaxing limits on foreign investment could be considered to halt the rupee’s slide. A variety of dollar-denominated products, including bonds, could be looked at, HSBC Holdings Plc analysts wrote in a June 22 research note.
“This would only slow rupee weakness and not change the overall direction,” HSBC currency analysts led by Paul Mackel in Hong Kong wrote in the note. “For the rupee to strengthen more meaningfully and sustainably against the dollar, the government needs to do more than short-term patch work. It needs to undergo the necessary structural reforms.”
Prime Minister Manmohan Singh’s administration has seen its agenda stymied by opposition from its own coalition allies, and last year suspended a plan to allow Wal-Mart Stores Inc. and other foreign companies to buy majority stakes in Indian multi- brand retailers. An anti-corruption bill and proposals to allow foreign direct investment in pensions have also been shelved.
The approaching personnel shift in India’s leadership offers an opportunity to reinvigorate the government’s agenda. A successor for Mukherjee, who told parliament May 16 that the administration will keep up its campaign for greater economic opening, has yet to be named.
While mostly a ceremonial post, India’s president is the supreme commander of the armed forces and oversees the creation of a government in the event of a hung parliament. The leader is chosen by an electoral college that consists of elected legislators from the states and both houses of parliament. The winner will succeed President Pratibha Devisingh Patil, whose five-year term ends July 24.
Even with the foreign-investment measure stalled, India did get a commitment from IKEA, the Swedish retailer known for its self-assembled furniture, last week. The company will boost the amount of products it sources from India significantly, according to an e-mailed statement from India’s commerce ministry. It also plans to set up 25 stores in the country and may invest 600 million euros ($754 million), the ministry said.
The rupee’s slump has contributed to inflation because India buys 80 percent of its oil from overseas and pays for supplies in dollars. Every one-rupee drop in the domestic currency against the dollar boosts annual revenue losses for the three government-owned refiners by 80 billion rupees ($1.4 billion), the oil ministry said in November.
The Reserve Bank of India on Nov. 17 increased the caps on overseas investors’ holdings of India’s local-currency government debt and corporate bonds by $5 billion each to boost inflows and arrest the currency’s decline.
The central bank has asked oil refiners to obtain 50 percent of their dollar requirements from a single state-owned bank, Oil Secretary G.C. Chaturvedi told reporters in New Delhi on June 22.
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