Delhi pledges to cut current account deficit but rupee unmoved

The rupee fell 0.7 per cent to Rs61.28 per dollar, but remained above last week’s record low of Rs61.80

Mr Chidambaram’s promise to limit the current account deficit to $70bn – and to help finance it by allowing more foreign borrowings from India-based companies – is the latest official attempt to stop the rupee from sinking following a sharp slowdown in economic growth and rising international concerns about India’s deficits.

In parliament, Mr Chidambaram outlined broad plans to curb the cost of gold, oil and luxury goods imports, while encouraging more external borrowing, especially in the form of quasi-sovereign debt issued by state financial and oil companies.

That initial statement of strategy was described by Nomura as “mildly disappointing”. Economist Sonal Varma wrote: “The measures broadly fall in the category of quick fix solutions.”

Mr Chidambaram later called a press conference at short notice to flesh out his plans, saying the country could save $5.5bn by limiting imports of gold and oil and would help fund the remaining deficit with $11bn of new foreign borrowing.

“I’m putting these figures in the public domain in order to indicate our commitment to contain the current account deficit,” he said. “We will be able to contain this year’s current account deficit at about $70bn.”

Since retaking the post of finance minister a year ago, Mr Chidambaram has unveiled reforms designed to boost foreign direct investment and economic growth while curbing the fiscal and current account deficits, but investors remain wary of regulatory obstacles in India and the poor state of the country’s transport and power infrastructure.

Trade figures for July gave the government a rare piece of good news on Monday, when they showed exports rising nearly 12 per cent to $25.83bn from the same month last year, while imports fell 6 per cent to $38.10bn.

That cut the trade deficit by nearly a third and suggested that the weakness of the rupee could already be helping to boost exports of Indian textiles and pharmaceuticals while limiting the country’s imports – although the export numbers were flattered by the low level of shipments in July 2012.

Other data were less encouraging. Industrial output fell 2.2 per cent year-on-year in June, while inflation in July as measured by the consumer price index remained high at 9.64 per cent.

Naina Lal Kidwai, president of the Federation of Chambers of Commerce and Industry, expressed concern about industrial output and said the figures “clearly indicate that supply side bottlenecks and weak consumer demand are weighing down on industrial growth”.

India’s governing Congress party and its rivals have begun to prepare their campaigns for the next general election due by May next year, which means politicians are unenthusiastic about the kind of fiscal and trade discipline that Mr Chidambaram is trying to enforce to defend the rupee.