Attributing the decline in the rupee to a host of global and domestic factors, the government on Tuesday informed Parliament it has taken a slew of steps to check forex volatility and is monitoring the situation.
“The government is continuously monitoring the emerging external sector developments leading to higher CAD and rupee depreciation. (The government) has taken a slew of initiatives to boost exports and reduce imports, encourage capital flows to facilitate financing of CAD and stem the volatility in the exchange rate of the rupee,” Finance Minister P. Chidambaram told the Rajya Sabha in a written reply.
The rupee hit a record low of 61.80 to the dollar in afternoon trade on Tuesday, while the S&P BSE Sensex declined more than 300 points. The currency has lost over 16 per cent since April.
Referring to the measures taken by the government to support the rupee, Mr. Chidambaram said they include “raising the rate of interest subvention from 2 to 3 per cent that will benefit exporters and small and medium enterprises, hike in import duty on gold, liberalisation of FDI, etc.”
Regarding the current account deficit (CAD), the Minister said it has declined to 3.6 per cent in the January-March quarter from 6.5 per cent in the previous quarter of 2012-13.
For the full fiscal 2012-13, the CAD worked out to 4.8 per cent of GDP, or USD 88.2 billion.
In a separate reply, Minister of State for Finance Namo Narain Meena said the rupee depreciated significantly in the second half of 2011-12 owing to the impact of the Eurozone crisis on the Indian forex market.
Mr. Chidambaram said the rupee’s decline in recent months was due to “concerns relating to high current account deficit... In addition, the rupee has depreciated on account of risk-off stance by global investors in emerging markets, anticipating that the US Federal Reserve could begin tapering its asset purchases.”
He added that the uptrend in US yields and portfolio outflows in recent months have led to a sharp depreciation of the rupee against the US dollar.
Mr. Meena further said the sharp fall in the value of the rupee can be explained by supply-demand imbalance in the domestic foreign exchange market on account of volatility in FII inflows.
Elaborating upon the steps taken by the government and the RBI to stabilise the rupee, Mr. Meena said the central bank has intervened in the market and had tightened liquidity by raising borrowing costs for banks.
The government, he said, has liberalised FDI in various sectors, enhanced FII limits in government and corporate bonds and relaxed ECB norms for NBFCs.
A significant part of the widening of the trade deficit was due to higher imports of key commodities such as crude oil, coal and fertilisers, Meena said, adding that the “pass-through of such higher cost to the domestic market has been limited in view of the still substantial outgo on account of subsidisation of products like diesel, LPG, kerosene, fertiliser and energy. As such, the impact of rupee depreciation on domestic consumers is mitigated to a large extent. Headline WPI inflation has remained at moderate levels in recent months.”
Inflation as measured by the wholesale price index declined to 4.86 per cent in June, although retail inflation inched closer to double digits at 9.87 per cent.