India fears rupee might slump to Rs16.33 against UAE dirham

UAE expats heaved a sigh of relief as the Indian rupee fell about 2 per cent to Rs14.33 against the UAE dirham yesterday. The dirham fetched up to Rs14.22 at the remittance counter – a marked improvement over the Rs13.94 that Indian expats got for their dirhams over the past weekend.

The decline is the most that the rupee has witnessed in a single session in more than three months as India searches for a “credible and feasible” fiscal consolidation plan.

Days after the government-commissioned Kelkar Committee acknowledged that the country’s economy was nearing a fiscal cliff, India’s finance minister P. Chidambaram said yesterday that his ministry will soon unveil a five-year plan for a “credible and feasible” fiscal consolidation path.

“No one will have confidence in the Indian economy if there is uncertainty about the fiscal stability of the country,” Chidambaram told a media gathering in New Delhi yesterday. “It is our intention to announce a credible and feasible path of fiscal correction beginning this year and ending in the fifth year of the 12th plan [which ends in March 2017],” he said.

In an interview with the Wall Street Journal, Chidambaram admitted that time was not on India’s side, and that the government knows that it has to act before the rupee slumps to 60 against the US dollar (16.33 against the UAE dirham).

“When I took over in August, I came to the conclusion that we do not have the luxury of time. We cannot wait any longer,” the WSJ quotes him as saying. “The fiscal situation, the ballooning expenditure, inflation, and the slowdown of investments led me to conclude that we did not have too much time and some decisions had to be taken and announced immediately,” he said.

“Could we have waited until the day when the rupee had touched 60 to a dollar? Could we have waited for a further draw-down of foreign-exchange reserves? The answer is obviously no. And therefore we took these decisions,” Chidambaram explained the rationale behind the recent slew of reforms announced by the government after years of policy paralysis.

Chidambaram’s comments left no doubts that India is concerned not just about actual growth, but also the perception of that growth among international investors, and some of the recently announced steps may actually be to portray a reformist image of the Indian economy.

“Some rating agencies had talked about a downgrade. We believe that India does not deserve a downgrade but we take such talk seriously. Secondly, every banker and every major industrial house told me they were finding it difficult to raise capital, both in the Indian market and abroad. Thirdly, supply-side constraints were becoming more acute, and unless new investments are made, these supply-side constraints cannot be removed,” he told the WSJ.

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