The rupee touched a new low of 61.21 to the dollar on Monday, raising fears of higher inflation and limiting the Reserve Bank of India’s elbow room to make borrowing cheaper for firms and individuals.
Credit is vital to spur investment and boost spending to reverse the decade-low slowdown in the Indian economy.
A falling rupee and choppy equity markets — the BSE Sensex ended 171 points lower at 19,324.77 on Monday — has added to the UPA government’s owes battling to jumpstart Asia’s third largest economy, hit by weak employment growth and salary hikes.
Prime Minister Manmohan Singh will meet business leaders on July 29 to discuss steps to tone up the economy.
The Indian economy was until recently an engine for global growth. The discussions will centre on measures to steer India out of a web of economic mess -- from a sharp slowdown in growth to a free-falling rupee, from industrial deceleration to reining in the current account deficit (CAD), the difference between dollar inflows and outflows, and from ways to plug skill shortage to accelerating the implementation of key infrastructure projects.
The rupee closed the day at 60.61 to dollar on Monday.
Strong jobs data in the US prompted foreign funds to withdraw money from emerging economies’ currency and equity markets amid looming signs that the Fed will wind down its monetary stimulus programme by mid-2014.
The rupee’s persistent downward spiral has sparked off speculation that the RBI will implement a fresh set of measures including allowing oil companies to buy dollars through a special window and not in currency markets, a move aimed at easing the persistent pressure on the rupee.
Foreign capital flows have become critical for India, as the rupee has lost almost 6% in a month and CAD hit a high 4.8% of GDP in 2012-13.
The record CAD may restrict the RBI’s space to prop up the rupee by dipping into its $285 billion of foreign exchange reserves, enough to cover imports for seven months, analysts said.
“We believe that the RBI will find it difficult to sell beyond $30 billion,” said Indranil Sen Gupta, India economist, DSP Merrill Lynch (India).
In recent weeks, the government has announced a string of steps including a bold decision to increase prices of natural gas and ambitious plans to build infrastructure to restore some faith in the economy in a politically significant year.
The government, sources said, is readying a raft of measures including allowing up to 100% FDI in the telecom sector and opening up the defence production sector to 49% FDI from the current limit of 26%.