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FM P. Chidambaram lays out new steps to aid Indian rupee but market isn’t impressed

‘Markets were slightly subdued after the industrial production and retail inflation data was released.’ (AP)

Finance Minister P Chidambaram today announced measures to allow public sector financial institutions to raise dollar-based loans from abroad and raised taxes on precious metals and other non-essential items to give the Reserve Bank of India additional reserves to keep the rupee within 60 to a dollar.

His announcements in Parliament and later with reporters came on a day when the factory production data released by the government shows a contraction of 2.2 per cent in June and of 1.1 per cent for the first quarter of the year. On a positive note, however, exports have hit double digits after two years while retail inflation has eased to 9.64 per cent in July from a month ago. This data, too, was released on Monday.

The minister hopes to compress the current account deficit to 3.7 per cent for this fiscal (4.8 per cent in 2012-13) or $70 billion, which will mean less pressure to attract foreign funds inflow to finance it. A lower deficit will also shore up the rupee as investors will see it as a sign the government is keen to improve the economy.

“The stability in rupee will depend on reducing volatility in the currency markets and impressing on players that the CAD will be contained and fully and safely financed,” Chidambaram explained at his press conference.

But the announcements failed to elicit the expected reaction from the currency markets and the rupee fell 39 paise to end at 61.27 against the US dollar.

“The markets were slightly subdued after the industrial production and retail inflation data was released. But if the government can manage to stem the gold and oil imports, it will give them a good shot at containing the CAD,” said Saugata Bhattacharya, chief economist at Axis Bank.

… contd.

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