PM tries to quell crisis fears, growth skids to 4-year low
Monday, 2 September 2013 00:00
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Reuters: Prime Minister Manmohan Singh sought to quell fears of a currency crisis on Friday as economic growth fell to a four-year low, while New Delhi raised prospects of joint intervention with other countries following the rupee’s crash to record lows.
The Finance Ministry’s principal economic adviser, Dipak Dasgupta, told Reuters that India was liaising with governments in other emerging-market countries to co-ordinate intervention in offshore currency markets. Dasgupta predicted action soon, but he declined to share specific details of the discussions.
The move to target traders abroad came as the rupee suffered its worst month ever, dropping more than 8% against the dollar in August as confidence drained out of India’s economy.
Data on Friday showed economic growth decelerated to 4.4% in the April-June quarter, its slowest rate since the first three months of 2009.
Earlier in the day, the prime minister said the currency’s fall was a matter of concern, but dismissed doomsayers’ predictions for the economy, insisting its fundamentals remained sound and its banking system was well capitalised above international requirements.
“We need to ensure the fundamentals of the economy remain strong so that India continues to grow at a healthy rate for many years to come,” the octogenarian prime minister told lawmakers in his first significant speech to parliament on the economy in months. “That we will ensure. We are no doubt faced with important challenges.”
India suffered decade-low growth of 5% in the fiscal year that ended in March, and many analysts surveyed by Reuters during the past week expect this year to be worse.
Weak growth, a record high current account deficit and concerns about the government’s finances are proving a toxic mix for the rupee, which hit a record low of 68.85 to the dollar on Wednesday after falling 20% since May.
The rupee’s defence so far has largely rested on a strategy from the Reserve Bank of India to drain cash from domestic money markets and raise short-term interest rates. But that has made it more costly for struggling corporates to raise money, putting another brake on growth.
“The growth outlook continues to be weak in light of tight monetary conditions and an absence of any pick-up in investment demand,” said A. Prasanna, an economist at ICICI Securities Primary Dealership in Mumbai.
Aggressive dollar selling by the Reserve Bank of India, rather than Singh’s speech to parliament, helped pull the rupee out of a slide back towards the lows, and it ended at 65.70 per dollar, firming from Thursday’s close of 66.55 and finishing stronger for a second straight day.
But, RBI intervention is proving costly, with data on Friday showing currency reserves fell to $277.72 billion as of August 23, enough to cover over 6 months of imports and down $19 billion since the end of last year.
Raghuram Rajan, a former chief economist at the International Monetary Fund, is set to take over as RBI governor next Thursday, replacing career civil servant Duvvuri Subbarao who has led RBI’s defence of the currency so far.
Singh, a veteran economist who made his reputation as finance minister overseeing India’s recovery from a balance of payments crisis in 1991, predicted growth would recover to 5.5% this fiscal year, above most analyst estimates.
That would still be way below what is needed given India’s demographics. Finance Minister P. Chidambaram warned on Tuesday that growth needed to average 8% to generate jobs for the increasing numbers of youth joining the workforce.
Singh said the government would need to find ways to reduce imports of gold and oil products to reduce the trade gap, while the rupee’s depreciation would help make exports more competitive and reduce imports.
Yet, with a national election due by May, Singh’s minority government is under fire from all quarters to come up with meaningful reforms, including a possible increase in diesel prices that would lower the subsidy burden.
“My concern is that with the election still a few months away we’re are not going to get the sort of reforms that the country needs,” said Peter Elston, head of Asia-Pacific strategy and asset allocation at Aberdeen Asset Management in Singapore.
“All we’re going to get is the reforms that are not long-term oriented, but just designed to win votes, like the food bill.”
Parliament passed this week a 1.35 trillion rupees plan to provide subsidised grains to the poor that raised concerns about spending.
Fears that the government will fail to meet its target of bring its fiscal deficit down to 4.8% of GDP this year were heightened by data released on Friday.
During the first four months of this fiscal year the deficit had reached close to 63% of the full-year target. Revenues were just 16% of the target, while spending was 31.3% of the target.
Despite India’s domestic woes, policymakers have long blamed offshore traders for aggravating falls in the rupee with speculative bets in currency-based contracts traded in financial centres such as Singapore.
Some traders in Mumbai agree, saying that the severe bearish bets against the rupee in the offshore markets had a negative impact on the rupee’s opening trades on days when other Asian currencies were relatively stable.
But policymakers cannot deflect blame for the lack of investment in the economy or policies that have allowed the current account deficit to reach unsustainable levels.
In response, they have rolled out a series of measures to curb oil and gold imports and open up the economy further to foreign investors, though so far with limited impact on the rupee.
The central bank is considering a radical plan to cut gold imports by pushing commercial banks to buy gold from ordinary citizens and sell to precious metal refiners, a source familiar with the RBI’s thinking told Reuters.
