India finmin pledges more reforms but rupee drops further
While emerging markets’ currencies have been sold off recently, the Indian rupee has been hit harder than most because of the country’s hefty current account deficit.
India’s finance minister on Thursday pledged new reform measures by the end of June including lifting caps on foreign direct investment and changes in locally-produced gas prices to win back investor confidence.
Palaniappan Chidambaram’s comments come as the rupee has slumped to a record low of 58.98 per dollar this week, adding to concerns about the prospects of a recovery in Asia’s third largest economy.
While the fall is part of a sell-off in riskier assets across the region, the Indian currency has been hit harder than other emerging market currencies because of the country’s hefty current account deficit.
However, Chidambaram failed to have an impact as traders cited his lack of specific actions. The rupee fell to 58.48/49 per dollar from its close of 57.79/80 on Wednesday.
Chidambaram’s promise of fiscal reforms, which analysts say are necessary to narrow the current account deficit, come after Fitch Ratings on Wednesday returned India’s sovereign outlook back to “stable” from “negative” a year after its downgrade.
“My appeal to everyone is we have to take a long term view what’s happening in India and what will be the results we will achieve over a period of time,” Chidambaram told a media briefing.
“I think significant results have been achieved in last 9 months and I m looking forward to more reforms.”
Analysts say a recovery in the rupee would be made harder without concrete action. The current bout of global risk aversion is seen also exposing concerns about India’s economic growth prospects at a time when consumer inflation remains high.
The government’s ruling minority coalition also faces state votes due before a national election next year, putting into doubt whether it can keep fiscal discipline and pass reforms.
Chidambaram said on Thursday the government would plough ahead, reviewing sectoral caps for foreign direct investors in all sectors, including defence.
Asia’s third largest oil consumer is in the process of raising prices of locally produced gas on the basis of a complex formula suggested by a panel headed by an advisor the prime minister.
The government is also looking to pass a measure allowing cash-strapped power utilities to pass on the higher rising cost of imported coal to customers.
Policy makers are also looking to attract institutional investors, with market regulators on Wednesday raising investment limits for long-term foreign investors in government debt by $5 billion to $30 billion.
Still, as investors await actual announcements, another key concern will remain implementation of reforms.
India opened up the retail sector last year but toughened some of the rules for potential foreign investors such as Wal-Mart Stores. Meanwhile its hike in diesel prices last year cost it a partner in the ruling coalition.