More steps announced to defend Rupee, CAD.
By R. Chandrasekaran
CHENNAI: Finance Minister P. Chidambaram has announced fresh measures to not only defend the Indian currency but also control the current account deficit (CAD), which is threatening to deteriorate as the funds inflow from foreign investors were not satisfactory. In fact, there were significant outflows in the last two months. As part of efforts, the import duty on gold and silver were hiked.
The Minister promised the Parliament on Monday that he will control the CAD to 3.7 percent of the GDP in the current fiscal year. His announcement came close on the heels of the Reserve Bank of India announcing its intention last Thursday to sell Rs.220 billion cash management bills every Monday without specifying the time frame. The central bank’s latest measures were preceded by two similar measures to defend the Indian currency on July 15 and 22.
As part of the exercise to control the Indian currency from sliding further, the government will cut down the import of oil, gold, silver, and non-essential goods. The government is not averse to increasing the import duty further on gold to cut down its import further. On Tuesday, the government hiked import duty on gold and platinum to 10 percent from 8 percent and that of silver made from ore to 8 percent from 4 percent.
Chidambaram also said that the government will allow public sector financial institutions and oil companies to raise $4 billion from abroad as quasi-sovereign bonds, whereas public sector oil companies will be permitted to raise more funds, i.e. $4 billion, by external commercial borrowings (ECBs).
The central bank will issue a circulation to permit multinational companies, which have subsidiaries in India, to raise ECBs. In an order to attract more non-resident accounts, interest rates would also be deregulated to increase capital flows into India.
Chidambaram expects that the combined proposals would bring in about $11 billion in the current fiscal year thereby taking up capital inflows estimation to $75 billion.
The government is also planning to increase excise or import duty on electronic goods and some luxury items. The significant fall in the Indian currency has already lifted the electronic items price such as the smartphones or tablet PCs or components such as hard disk. Though the government has not disclosed the electronic or luxury items that will attract higher import duty, any further increase in import duty will bound to hurt the sales of such electronic or luxury items.
Despite the government’s latest announcement, the Indian currency traded weak in India on Tuesday.
To contact the author, email to rchandrasekaran@americanbazaaronline.com