Chagrined by the rupee touching a new life-low of 65.52/dollar in intra-day trades, the government and the Reserve Bank of India (RBI) huddled together on Thursday, declared the currency was “undervalued”. Finance minister P Chidambaram sought to soothe the currency market promising “structural measures” to enhance the economy’s productive capacity and boost investor confidence.
Asserting that recent curbs on dollar outflows should not be misconstrued as capital controls and pledging to revoke them as soon as the rupee’s stability is restored, Chidambaram called the current market panic “unwarranted”, resulting partly from a “distorted” reading of recent RBI measures.
On a day when the RBI said inflation could accelerate in the current financial year due to the rupee’s sharp depreciation and rating agency Fitch said the current slump in investor confidence, unless halted, could lead to negative rating action, the finance minister said GDP growth would likely pick up in the second to fourth quarters although might be subdued in the first quarter.
Among the short-term measures being planned is a likely reduction in export duty on iron ore, (currently 30% on both lumps and fines) a renewed plea to the Supreme Court to lift the ban on ore mining in Goa and steps to augment output and supply of coal, increasingly a strain on the current account. The economy, he said, would be aided by a 9% increase in sown area, enhanced Plan spending and projects cleared by the Cabinet Committee on Investment in the last few months. The finance minister expressed hope that merchandise exports would pick up in the second half of the fiscal, while net services exports and FDI were already doing well.
During the day, Chidambaram had a two-hour-long meeting with RBI governor D Subbarao, governor-designate Raghuram Rajan and economic affairs secretary Arvind Mayaram, and met Prime Minister Manmohan Singh to brief him about the economic situation. He expressed optimism that the FY14 current account deficit could be even lower than $70 billion estimated earlier, and this would be financed “more than comfortably”.
“We believe the rupee is under-valued and has overshot what is generally believed to be a reasonable and appropriate level,” Chidambaram said, but stuck to the position that the government won’t ascribe the currency a value.
Addressing the media separately, Subbarao also reiterated that what the current situation demanded were structural measures which, by definition, might take time to give the desired results. “In