NEW DELHI/MUMBAI, Aug 29 (Reuters) - The Indian rupee
rebounded on Thursday from a record low as the central bank sold
dollars to oil companies, while policymakers scrambled for more
lasting solutions to what some investors are describing as a
Among the steps debated by policymakers on Thursday were
monetising the country's stash of gold and lowering fuel
consumption to reduce import demand.
Prime Minister Manmohan Singh also told parliament he was
likely to make a statement on the economy on Friday when asked
by lawmakers what steps were being considered on the rupee.
Singh's ruling coalition has been under fire to revive an
economy growing at the slowest rate in a decade, narrow a record
current account deficit and shore up government finances - a
daunting task ahead of general elections due by May.
"I cannot deny that the country is faced with a difficult
situation," Singh said in brief remarks to the upper house of
parliament on Thursday.
"There are some domestic factors. There are also some
international factors arising out of change in U.S. monetary
stance," he said, noting that rising tensions in Syria could
drive up oil prices.
Although India has been hit by global factors such as
concern over the Federal Reserve reining in its stimulus and the
situation in Syria, few investors think these are the main
problems for the rupee, which has fallen nearly 19 percent this
"It's a serious crisis of confidence and credibility. We
could have managed things better," said Rahul Bhasin, managing
director of Baring Private Equity Partners (India).
In the absence of major government action, the Reserve Bank
of India, the central bank, has been the main defender of the
currency, with a series of extraordinary measures including
draining cash and curbing speculative trading.
Outgoing RBI Governor Duvvuri Subbarao defended the bank's
action last month, calling it necessary to stabilise markets.
But he said longer-term solutions, such as narrowing the
country's current account deficit, lay with the government.
"The only lasting solution to our external sector problem is
to reduce the CAD (current account deficit) to its sustainable
level," Subbarao told industry and bank executives in Mumbai.
"Reducing the CAD requires structural solutions. RBI has
very little policy space or instruments to deliver the needed
structural solution. They fall within the ambit of the
government," he added.
The RBI said late on Wednesday it was providing a special
window with immediate effect to sell dollars to Indian Oil Corp
Ltd, Hindustan Petroleum Corp, and Bharat
Petroleum Corp Ltd.
The decision is aimed at removing a major source of dollar
demand from the spot market.
The rupee strengthened to 66.85 per dollar, up
sharply from a record low of 68.85 per dollar on Wednesday when
the currency posted its biggest percentage fall in 18 years.
Thursday's rupee bounce also boosted shares and bonds,
underscoring how movements in domestic markets are increasingly
being driven by the beleaguered currency.
Surging prices for gold and oil could put more pressure on
the current account deficit despite government action to curb
India's two biggest imports.
Indian Trade Minister Anand Sharma said the RBI could
monetise its gold reserves to reduce import demand for the
precious metal but emphasized it was for the bank to decide.
Oil Minister Veerappa Moily said India was working on
measures aimed at lowering fuel consumption. Oil is India's
biggest single import item, so reducing domestic demand could
cut imports and so ease pressure on the rupee.
Traders speculated the government might try to raise
state-subsidised fuel prices to reduce oil demand.
India raised diesel prices in September, in a decision that
cost Singh's ruling coalition its majority in parliament after
partners bolted. The government followed up in January by
allowing fuel retailers to gradually raise prices of diesel.
Upcoming elections have raised concern the government will
lack the willpower to undertake reforms, as recent action
suggests more of a populist bent that could worsen confidence in
its fiscal discipline.
Parliament this week passed a 1.35 trillion rupee ($19.8
billion) government plan to provide subsidised grains to the
poor, raising concerns about spending.
The Congress Party is next seeking to pass a controversial
bill that would compensate farmers for land acquired for
infrastructure and industrial projects, but which critics say
could end up raising costs for companies.
"I think it's a horribly volatile situation, I think it just
makes life miserable for all of us," said Rostow Ravanan, chief
financial officer at Mindtree Ltd about the current
Indian bond yields have spiked, which threatens to drive up
the government's borrowing costs.
While Brazil and Indonesia have raised interest rates to
stem pressure on their currencies, similar action is seen as
unlikely in India as it may undermine an already weak economy.
Subbarao, whose tenure ends next week, called for the
central bank to maintain its defence of the rupee.
"There has been criticism that the Reserve Bank's policy
measures have been confusing and betray a lack of resolve to
curb exchange rate volatility. Let me first of all reiterate
that our commitment to curbing volatility in the exchange rate
is total and unequivocal," he said.
How the RBI continues to defend its measures will now be
Raghuram Rajan to decide. The former chief economist of the
International Monetary Fund will take over as the central bank
head on Sept. 5.