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 currency climbed.
The government and central bank will make the announcement, Finance Minister Pranab Mukherjee told reporters in Kolkata on June 23. Foreign investment limits in Indian debt may be raised as policy makers consider as many as 12 measures to halt the rupee’s slide, a government official familiar with the plan said.
India’s currency is Asia’s worst performer of the past year, having tumbled about 20 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 issuing bonds 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.”
Mukherjee and Reserve Bank of India Governor Duvvuri Subbarao will today also discuss easing rules for investment in infrastructure bonds, said the official, who asked not to be identified because the details aren’t yet public.
Rupee’s Slide
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. Moody’s Investors Service said today it is maintaining its stable outlook.
The rupee, which reached an all-time low on June 22 of 57.3275 per dollar, rose 1.2 percent to 56.45 per dollar as of 10:44 a.m. local time, the biggest gain since Jan. 27.
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.
Joshi said 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.
‘Structural Reforms’
“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.”
India’s benchmark inflation rate has remained elevated even as that of other Asian nations retreats. Wholesale prices rose 7.55 percent in May from a year before, compared with 7.23 percent in April. Singapore today reported its rate fell to 5 percent, from 5.4 percent in April.
Among other economic data scheduled for today, German consumer confidence will probably retreat in July, according to the median of 22 estimates before a report by market research company GfK SE. The Nuremberg-based firm may forecast today that its consumer-sentiment index, based on a survey of about 2,000 people, will drop to 5.6 from 5.7.
U.S. Home Sales
In the U.S., new home sales are projected to accelerate to 346,000 at an annualized pace for May, a three-month high. Even so, a separate report tomorrow may show property values remain still under pressure. The S&P/Case-Shiller index of prices in 20 cities fell 2.7 percent in the 12 months ending in April, little changed from the 2.6 percent decline in the year through March, economists in a Bloomberg survey predicted.
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.
Mukherjee, the ruling Congress party’s nominee for president, 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.
Opportunity to Reinvigorate
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.
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 ($752 million), the ministry said.
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 said June 22.
To contact the reporter on this story: Rajhkumar K Shaaw in Mumbai at rshaaw@bloomberg.net
To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net
