Currency panic 'unwarranted': Indian finance minister

India's finance minister said on Thursday that intense selling pressure on the rupee was exaggerated and that the currency market "panic" was unnecessary.

The rupee, which has hit record lows for five straight trading days, slumped to 65.56 to the dollar on Thursday.

"The panic that has gripped the currency market is unwarranted," P. Chidambaram told a press conference.

"It is almost universally accepted that the rupee is undervalued and has overshot the reasonable and appropriate level," he said, describing the volatility in the currency market as "unacceptable".

The rupee has lost about a fifth of its value this year and there are doubts over whether policymakers are in control of the situation.

Global ratings agency Fitch warned in a statement Thursday that India, which it rates BBB with a stable outlook, may see its credit ratings lowered if it does not halt the fall in investment.

"Unless reforms related to growth and lowering the current account deficit are addressed, things will not improve," said economist Devendra Pant with India Ratings, part of the Fitch group.

The rupee recovered marginally from its day's low to end trading at 64.55 on Thursday, while Indian shares closed up 2.27 percent or 407.03 points to 18,312.94 points, snapping four straight days of declines.

Chidambaram said there was no plan to resort to capital controls and that reviving growth, which has slumped to a decade low of five per cent in the year to March, would remain the focus of government.

"We are exploring structural measures to reduce the current account deficit and improve foreign capital inflows," he said, adding that the deficit would be contained at $70 billion this fiscal year.

India's large current account deficit must be funded with foreign capital.

Economists are concerned that the US Federal Reserve will begin winding down its bond-buying scheme, which has helped fuel an investment splurge in Asia's emerging markets.

Since June 1 -- after the US Fed signalled a tapering of its stimulus -- overseas funds have pulled out nearly $12 billion from India's stock and debt markets.

The Reserve Bank of India (RBI) and the government have been trying to stabilise the rupee for months by announcing measures such as hiking short-term interest rates and imposing capital controls.

But the measures have failed to halt the plummet and this week the central bank changed tack, announcing it would inject 80 billion rupees ($1.26 billion) into the banking system by buying back long-term government bonds.

The move is aimed at making more credit available to boost economic growth.

If the crisis worsens the country may be forced to go to the International Monetary Fund to borrow funds in a repeat of its 1991 balance of payments problems.

But the RBI's annual report for 2012-13, released on Thursday, said India's foreign exchange reserve, "although lower than in the pre-crisis period, is adequate to finance about seven months of imports".

RBI governor Duvvuri Subbarao later said this was enough to manage the current situation.

Dealers have said they fear the rupee could weaken further -- with Deutsche Bank analysts forecasting on Wednesday that the it could fall to 70 to the dollar.

Minutes from the US Fed's July policy meeting released on Wednesday showed board members had differing opinions on when the US economy would be strong enough to wind down the $85 billion a month bond-buying.


 

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