Finance Minister P Chidambaram today announced measures to allow public sector financial institutions to raise dollar-based loans from abroad and raised taxes on precious metals and other non-essential items to give the Reserve Bank of India additional reserves to keep the rupee within 60 to a dollar.
His announcements in Parliament and later with reporters came on a day when the factory production data released by the government shows a contraction of 2.2 per cent in June and of 1.1 per cent for the first quarter of the year. On a positive note,however,exports have hit double digits after two years while retail inflation has eased to 9.64 per cent in July from a month ago. This data,too,was released on Monday.
The minister hopes to compress the current account deficit to 3.7 per cent for this fiscal (4.8 per cent in 2012-13) or $70 billion,which will mean less pressure to attract foreign funds inflow to finance it. A lower deficit will also shore up the rupee as investors will see it as a sign the government is keen to improve the economy.
The stability in rupee will depend on reducing volatility in the currency markets and impressing on players that the CAD will be contained and fully and safely financed, Chidambaram explained at his press conference.
But the announcements failed to elicit the expected reaction from the currency markets and the rupee fell 39 paise to end at 61.27 against the US dollar.
The markets were slightly subdued after the industrial production and retail inflation data was released. But if the government can manage to stem the gold and oil imports,it will give them a good shot at containing the CAD, said Saugata Bhattacharya,chief economist at Axis Bank.
Though market dealers blamed Mondays fall in the rupee to a lack of concrete details in the statement,the finance minister promised that detailed notifications on customs duties as well as changes made by the Reserve Bank of India would be tabled in Parliament soon. The minister made his statement in Lok Sabha amid din and uproar on unrelated issues.
The government announcements came after lengthy discussions and detailed calculations that expect the compression of demand of import items such as gold ( to be kept at 850 million tonne this fiscal against 950 mt last fiscal) and oil to yield in savings of $ 5.5 billion.
Meanwhile,measures to enhance capital flows,including a liberalisation in the external commercial borrowing regime and NRE and foreign currency non-resident deposits as well as issue of quasi sovereign bonds by IRFC,Power Finance Corporation and India Infrastructure Finance Company Ltd are likely to bring in an additional $ 11 billion.
In a business-as-usual scenario,the CAD would have been at $75.5 billion. But with these measures,we expect inflows to be more than sufficient to finance the CAD and there will be some accretion to reserves, the finance minister said,adding that this would be as essential to meet as the fiscal deficit target.