New Delhi: In an attempt to shore up the sliding rupee, the government on Monday unveiled a multi-pronged strategy to increase inflow of dollars and check outflows. The measures include a planned increase in import duty on several red-hot imports like gold and silver, allowing three public sector financial institutions to raise dollar funds through bonds, making NRI deposits more attractive and easing foreign loan norms. Taken together, these steps are expected to bridge the forex gap by $18 billion.
Through the measures announced on Monday, finance minister P Chidambaram is hoping to pare imports by $7 billion, while increasing dollar inflows by around $11 billion. This, he said, would help contain the current account deficit (CAD) at $70 billion or 3.7% of the gross domestic product, lower than last year's 4.8%. CAD has been blamed as the key factor behind the sharp volatility of the rupee against the US dollar.
CAD has widened as exports have remained sluggish, while gold and silver imports have spurted. India needs more dollar flows, through foreign investment, to fill the gap. BRIDGING FOREX GAP BY $18bn
Govt hopes to prune annual import bill by $7bn
MOVE | Compression in import of gold & silver via duty hikes IMPACT | Hopes to tame demand, save $4bn outflow
M | Compression in oil demand I | Govt looks to cut import bill by $1.5bn
M | Higher import duty on nonessential imports I | Lower demand expected to pare import bill by another $4bn
Announces measures expected to increase inflows by $11bn
M | PFC, IIFCL, IRFC to raise dollars in bonds with implicit govt guarantee I |Expected to mop up $4bn
M | Easing foreign loan norms I | MNC subsidiaries can tap dollar resources from parent
M | PSUs to tap dollar window I | $4bn can be raised in over- seas loans, trade finance. Will cut reliance on local currency market, reduce rupee volatility
Industrial output declined by 2.2% in June Exports rose 11.64% to $25.83bn in July; imports down 6.2% CPI inflation eased
to 9.64% in July from 9.87% in June Govt's renewed efforts fail to lift rupee
The slew of measures indicates the government's urgency to avert a possible crisis on the balance of payments front if the situation is left unchecked. "While we have a problem, there is no room for panic…I expect the volatility to decrease and also expect the rupee to stabilize (following the measures)," Chidambaram told a press conference. Although he did not elaborate on the products where customs duty is proposed to be increased, sources said some electronic goods top the list with measures expected to cut import of certain varieties of coal, crude palm oil and copper also on the anvil.
The urgency can be gauged from the government resorting to a quasi-sovereign bond issue by the Power Finance Corporation, Indian Railway Finance Corporation and India Infrastructure Finance Co Ltd. Such a bond issue was last used in 2001 when State Bank of India raised over $5 billion through the Indian Millennium Deposits in the aftermath of the dotcom bust and the 9/11 attacks. This time, SBI declined to be used as the vehicle to raise dollar debt.
The renewed effort from the government failed to lift the rupee. Despite the measures being announced first in Parliament in the afternoon, the rupee slid to 61.30 a dollar, a little short of last week's lifetime low of 61.80.
"These measures were in the pipeline. Despite that, the rupee seems to be under pressure. The rupee has been affected by growth worries on the domestic front and the quantitative easing tapering on the external front," said Moses Harding, executive director at Lakshmi Vilas Bank.
Most bankers and economists were unusually shy of commenting on the measures after RBI announced a clampdown recently.
"Till the structural issues are resolved the currency will behave in a similar pattern. That can be changed if we have more regular flow of FDI, which is the preferred form of foreign capital," said Devendra Kumar Pant, chief economist, India Ratings.  |
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