MUMBAI/NEW DELHI, Aug 27 (Reuters) - The Indian rupee hit a
record low and posted its biggest percentage fall in 18 years on
Tuesday after parliament's approval of a $20 billion plan to
provide cheap grain to the poor renewed doubts about government
resolve to control spending ahead of elections due next year.
The alarm over India's fiscal deficit eclipsed an
announcement by Finance Minister P. Chidambaram that the
government had approved infrastructure projects worth 1.83
trillion rupees ($28.38 billion), a step aimed at reviving
economic growth and shoring up investor confidence.
Instead, the rupee plumbed new depths while shares plunged
after Chidambaram spoke as his promise that the government will
meet its fiscal deficit target failed to turn sentiment.
"I have already said that 4.8 percent of GDP and the
absolute number that was indicated in the budget is a red line.
The red line will not be breached," Chidambaram told a news
conference. "I think we'll simply have to be patient, be firm,
do whatever is required to be done, and the rupee will find its
Traders said the currency market was working in a climate of
fear as repeated efforts by authorities to turn the markets
around failed to have a holding impact.
The rupee has lost 17 percent against the dollar so far this
year - making it the worst performer by far among Asian emerging
market currencies tracked by Reuters - despite frantic attempts
by the government and central bank to support it and repeated
comments by the finance minister that the rupee is oversold.
The partially convertible rupee slumped to a record
low of 66.30 to the dollar, despite central bank intervention to
ease the pace of the decline, surpassing its previous all-time
low of 65.56 hit last Thursday.
The currency fell 2.9 percent on the day to close at
66.24/25, its biggest single-day percentage fall since October
1995 according to Thomson Reuters data and its biggest fall ever
in absolute terms.
Shares also slumped, sending the benchmark BSE index
down more than 3 percent and benchmark 10-year bond
yields up 44 basis points.
Indian markets have been caught in a downward spiral since
May as the prospect for a tapering off in the Federal Reserve's
period of cheap money exposes India's vulnerability among
emerging markets - marked by a record high current account
deficit, a troubling fiscal deficit and the weakest economic
growth in a decade.
Yet, despite measures to address these concerns, including a
slew of steps to attract dollar inflows, Indian policymakers are
struggling to instil confidence.
"It's not out of choice, but out of compulsion that the
finance minister is announcing so many things," said G.
Chokkalingam, managing director and chief investment officer of
Centrum Wealth Management in Mumbai.
"The trinity of the fiscal deficit, slowing growth and an
unstable currency is hitting us badly. In addition to these, the
government has passed the food security bill which may put fear
in the mind of rating agencies."
Worries are growing that Prime Minister Manmohan Singh's
coalition government will be tempted into a populist spending
splurge ahead of the general elections due by May and so will
struggle to meet the fiscal deficit target.
The 1.35 trillion rupees ($20.94 billion) Food Security Bill
is a key part of the ruling Congress party's strategy to win
re-election, with its focus on selling subsidised wheat and rice
to 67 percent of India's population of 1.2 billion.
Kotak Institutional Equities said there would be "no free
lunch", estimating India's subsidy burden would reach 827
billion rupees from the budgeted 606 billion rupees.
"There are substantial challenges in procurement, logistics
and identification of beneficiaries," the brokerage said in a
note to clients.
The bill also comes at a time when the government is showing
signs of having increased spending since the start of the fiscal
year in April, reversing an earlier tight grip, while tax
revenues could stagnate amidst a slowing economy.
That is raising concerns about a potential ratings
downgrade, although Standard & Poor's is the only one of the
three major credit agencies to have a negative outlook on
India's BBB-minus sovereign credit rating.
Fitch Ratings analyst Art Woo warned on Monday that India
was finding it more challenging to meet its fiscal deficit
target as revenues slow.
Chidambaram sought to address concerns about the economic
slowdown by pledging to kickstart 36 stalled projects in sectors
ranging from oil, gas and power to roads and railways.
"The message that we are sending is that the investment
cycle has restarted, and we are pushing it. It is gathering
pace," he said.
However, analysts say these projects will not take off
quickly, while the government has little to show from recent
Its move last year to allow foreign investment in the retail
sector has yet to attract a proposal, though its liberalisation
of the aviation industry has yielded investment plans from
Malaysia's AirAsia and Abu Dhabi's Etihad Airways.
"I don't think these announcements in particular will
incrementally have any impact on sentiment until we see visible
impact of implementation and execution of these projects,"
said HDFC Bank chief economist Abheek Barua, referring to the
government's drive to energise the infrastructure sector.