FinMin moves to contain deficit fail to shore up rupee

K.R. Srivats New Delhi | Updated on March 12, 2018 Published on August 12, 2013



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On a mixed Monday for the economy, with exports showing an encouraging rise but industrial output contracting by a higher-than-expected 2.2 per cent in June, Finance Minister P. Chidambaram stepped up to bat for the embattled rupee by assuring Parliament that India’s burgeoning current account deficit (CAD) will be contained at 3.7 per cent of GDP in the current fiscal.

Although this would be sharply lower than the 4.8 per cent logged last year, and despite the more than $5-billion reduction in the trade deficit for July thanks to sharply increased exports, the rupee continued to weaken on Monday, sinking to a low of Rs 61.30 against the US dollar, before closing at Rs 61.27. “CAD is as much a red line as fiscal deficit. If we can contain CAD, sentiment about currency market and rupee will significantly improve,” Chidambaram told reporters on the measures being taken by the Government to stem the CAD and help boost the rupee.

However, the provisional trade data for July failed to cheer the forex market. India’s exports rose 11.64 per cent in July from a year ago while imports fell 6.2 per cent to $38.1 billion.

But India imported more gold in June than ever before, despite several steps to stem gold imports, while retail inflation remained high at 9.64 per cent.

To shore up the rupee, Chidambaram announced seven key measures, including compression in import of gold, silver and non-essential items and in demand for oil, raising of quasi-sovereign bonds by public sector financial institutions and liberalising external commercial borrowing normsbesides others.

“CAD is a problem but we have solutions. We will implement the solution and there is no room for panic,” he said, adding that these initiatives will help reduce forex volatility and contain the CAD.

With all these measures, the Government expects to contain CAD at $70 billion.

The new measures announced are likely to fetch $11 billion, while FDI estimate of $22 billion and some other measures will take net dollar receipts to around $75 billion against an estimated CAD of $70 billion. “After fully financing CAD, we expect some accretion to the reserves,” Chidambaram said.

CAD for 2011-12 was $78.2 billion for which $12.8 billion was drawn from the reserve. However, in 2012-13, CAD of $88.2 billion was not only fully financed but $3.8 billion was added to reserves.


Published on August 12, 2013
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