India plans to unveil steps to support the rupee after its slump to a record low against the US dollar threatened to intensify price pressures and increase the cost for companies of repaying foreign debt.
The government and the Reserve Bank of India are scheduled to unveil measures today, Indian Finance Minister Pranab Mukherjee told reporters in Kolkata on Saturday.
The ruling Congress party’s nominee for president, Mukherjee told the Press Trust of India he would resign from his current post tomorrow. A group of federal and state legislators will elect the next president on July 19.
Asia’s worst-performing currency over the past year, down 21 percent, the rupee 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 and a potential finance minister candidate, said last month one option was a deposit program to lure foreign currency from overseas Indian residents.
“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 [US] dollars. A lot of foreign-currency convertible bonds and other payments are due and it does create stress on those who have borrowed abroad,” he added.
Indian companies face a record US$5.3 billion of maturing -foreign-currency debt this year, data compiled by Bloomberg shows.
At the sovereign level, Fitch Ratings cut its outlook for India’s grade to negative last Monday, joining S&P in signaling the country is at risk of losing its -investment-grade status.
The rupee reached an all-time low on Friday of 57.3275 to the US dollar. 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 fiscal deficit and as its economic reform agenda stalled. The currency slumped 2.9 percent last week, its biggest loss since September last year.
Joshi said that besides the -deposit program, relaxing limits on foreign investment could be considered to halt the rupee’s slide.
A variety of US dollar--denominated products, including bonds, could be looked at, HSBC Holdings PLC analysts said in a research note of Friday.
“This would only slow rupee weakness and not change the overall direction of a weaker rupee,” HSBC Asian currency research 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.”
Indian 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.
The upcoming personnel shift in India’s leadership offers an opportunity to reinvigorate the government’s agenda. A successor for Mukherjee, who told parliament on May 16 that the administration would keep up its campaign for greater economic opening, has yet to be named.
The rupee’s slump has contributed to inflation because India buys 80 percent of its oil from overseas and pays for supplies in US 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 (US$1.4 billion), the Indian Ministry of Petroleum and Natural Gas said in November last year.