Indian rupee approaches record low on skepticism about new government measures

MUMBAI (Reuters) – The Indian rupee slumped to near a record low on Tuesday on doubts about the government’s latest plan to narrow the current account deficit, deepening concerns about the economy and fears of more foreign capital outflows.

India’s finance minister announced a slew of measures on Monday in a bid to relieve some of the grinding pressure on the currency, focusing on curbing imports and raising money abroad.

The aim is to narrow the current account deficit to 3.7 percent of gross domestic product in the fiscal year ending in March 2014, down from a record 4.8 percent in the previous fiscal year.

But markets were highly skeptical the steps would arrest the rupee’s decline, reflecting both increasingly weak economic fundamentals and expectations of further capital outflows from emerging markets if the Federal Reserve begins scaling back its stimulus measures in September as widely expected.

That raises prospects that the Reserve Bank of India will need to stick to its gambit of draining cash from the financial system longer than expected, risking further strains on the economy and, in turn, making it harder to attract vital foreign inflows.

“These measures need to be backed by structural reforms. Unless the fundamental woes are addressed, any sustained relief in the rupee will be temporary,” said Anubhuti Sahay, economist at Standard Chartered Bank in Mumbai.

The rupee fell to as low as 61.66 per dollar, nearing the record low of 61.80 hit on August 6. It has lost about 11 percent so far this year.

The first plank of the government’s much anticipated measures to curb the deficit revolves around containing gold imports and lowering the oil import bill. India would also impose tariffs on imported items such as fridges and televisions.

India also hopes to attract $11 billion in capital inflows by spurring state-run companies such as Indian Railway Finance Corp Ltd to sell debt abroad, and by raising money from Indians abroad, among other measures.

Although the government has reduced gold imports with a series of measures including raising duties, cutting oil import bills may be tougher given the weakening rupee is pushing up domestic fuel prices.

Imposing duties on non-essential items would also need to be carried out without breaking World Trade Organization rules.

Meanwhile, state-run companies would be raising money abroad in an uncertain global economic environment, and at a time when the rupee is weakening and growth remains weak.

For example, Indian Oil Corp (IOC.NS ), which is expected to raise $1.7 billion, last month sold 10-year dollar-denominated debt by paying about 50 basis points more over equivalent U.S. Treasuries than in its last sale in July 2011.

Economic data also remains discouraging. Figures on Monday showed industrial output declined a larger than expected 2.2 percent in June from a year earlier, hitting shares such as Larsen and Toubro Ltd (LART.NS ) on Tuesday.

Fears about the Fed’s tapering of its monetary stimulus and the weakening rupee have also sparked strong foreign selling, especially in debt. Foreign investors have sold a net $11.6 billion of Indian debt and equities since late May, when the rupee started its decline.

Even if India were to meet its target of narrowing the current account deficit to 3.7 percent, that would be still above what the RBI has called a sustainable deficit of 2.5 percent of GDP.

“Ultimately there is still little evidence to show a structural improvement in the current account,” said Scotiabank’s senior currency strategist Sacha Tihanyi in a note to clients.

“We continue to note that the current account deficit, at a level of even 3.7 percent of GDP, remains too large for India and still poses risks for the rupee.”

(Reporting by Rafael Nam- Additional reporting by Subhadip Sircar and Swati Bhat in MUMBAI and Neha Dsilva from IFR in HONG KONG- Editing by Kim Coghill)