The rupee flirted with record lows on Wednesday despite a slew of government measures to narrow the current account deficit,with inflation data later in the day expected to show further strains on the ailing economy.
Economists polled by Reuters expect the July wholesale price index to have risen slightly to 5 percent from a year earlier,hitting the ceiling of the Reserve Bank of India’s perceived comfort zone. The headline inflation data will be released at 12.00 IST.
Investors are also still awaiting details from the government about its plan to tax imports of non-essential items,while the RBI is expected to spell out how banks will be allowed to raise deposits from Indians abroad.
The piecemeal approach to disclosing details is keeping uncertainty high,and analysts fear the rupee could struggle unless the government announces more significant reforms – a prospect seen as unlikely as Prime Minister Manmohan Singh’s minority coalition gears up for general elections due by May.
“The stop-gap and lop-sided approach to address the structural current account shortfall is unlikely to provide relief for long,” said Radhika Rao,an economist at DBS in an email to clients.
“Any interim stabilisation in the rupee and sentiments could give way as soon as the markets get wind of the insufficiency of these initiatives in the weeks ahead.”
The partially convertible rupee was trading at 61.50 per dollar,near a record low of 61.80 hit earlier this month. It closed at 61.19/20 on Tuesday.
The rupee is down 1 percent since Finance Minister P. Chidambaram unveiled the government’s proposals to narrow a record high current account deficit on Monday.
The RBI’s risky gambit to drain cash from the system and raise short-term interest rates have also failed to prop up the currency,with the rupee down 2.6 percent since the initial set of measures were unveiled on July 15.
A recovery is seen as unlikely given data showing continued economic weakness,with data on Tuesday showing industrial output in June contracting more than expected.
Although inflation concerns had recently eased on the back of a good rainy season,a weakening rupee could change that equation,pushing up in the near-term prices of India’s two biggest imports: oil and gold.
The government on Tuesday raised import duties on gold,sending prices for the most-actively traded gold for October delivery on the Multi Commodity Exchange (MCX) to a four-month high on Tuesday,while the country has also said it plans to cut its oil import bill.