FM IS CALM IN THE RUPEE STORM

Rules out capital controls, insists growth will pick up by fiscal end and there is no need for pessimism

The Indian rupee on Thursday slipped below the psychological level of 65 against the dollar, hitting new lows for the fifth straight session. However, it registered a sharp recovery in the last hour of trade and closed at a low of 64.55, just ahead of a press conference by Finance Minister P Chidambaram, where he called for calm in the currency markets, saying stability will soon return.

The finance minister admitted that the “rupee is undervalued and has overshot the appropriate level” but tried to calm down investors by saying that there was no need for unwarranted pes- simism. Growth in the Indian economy was expected to pick up by the end of fiscal year 2013-14.

He also underscored that there was no cause for panic in currency markets and said communication was getting lost in the din.

‘’Stakeholders must not distort our messages,” he said.

The panic, he added, was feeding into other markets. The press conference came after a three-hour long discussion Chidambaram had with RBI Governor Subbarao, governor-designate Raghuram Rajan and other key officials. Both Chidambaram and Subbarao sought to address concerns of foreign investors saying there is no intention of capital controls and that the issues would be revisited as soon as the rupee stabilized. Last week, the Reserve Bank of India restricted how much its citizens and companies can invest abroad raising fears of outright capital controls that would further undermine the confidence of foreign investors. The fiscal deficit will be kept at 4.8 per cent of the GDP and the current account deficit will be restricted to 3.7 per cent of the GDP, Chidambaram asserted. The deficit will be fully financed, he added. The minister also said that all options are open before the government as far as the rupee is concerned. These options include issuance of sovereign bonds, he added. “Which option we will exercise at what time is a matter of judgement by the policy maker. I think it completely wrong to say an option is off the table,” he explained. The FM’s address is seen as another attempt to connect with markets. The rupee’s slide has hit stock markets and many analysts have pointed out that the central bank’s polices and statements have created confusion. In an ominous sign for Asia’s worst-performing currency this year, overseas investors who had been net buyers of Indian stocks so far in 2013 headed for the exits this week, selling a net $500 million worth of shares in the four sessions through Wednesday. Foreigners have also sold a net $1.3 billion of Indian government and corporate bonds so far this month. The Reserve Bank of India’s efforts to support the currency have failed to do much but have sent bond yields surging, pushing up borrowing costs and undermining an economy that grew at its weakest in a decade in the last fiscal year to March 2013.