As rupee crosses 65, Chidambaram says it is ’undervalued’

Mangalore Today/NDTV

New Delhi, Aug 22: The Indian rupee ended at a record closing low of 64.55 on Thursday as against Wednesday’s close of 64.11.

Earlier in the day, the rupee touched an all-time low of 65.56, but it registered a sharp recovery in the last hour of trade, just ahead of a press conference by Finance Minister P Chidambaram, who said that the "rupee is undervalued and has overshot the appropriate level."

 

He also said that there no need for unwarranted pessimism. Growth in the Indian economy, the minister said, was expected to pick up by the end of fiscal year 2013-14. India’s grew at the slowest pace in a decade in the previous fiscal.

The Finance Minister emphasised that there was no cause for the panic that had gripped currency markets and said communication was getting lost in the din.

’Stakeholders must not distort our messages," he said.

Mr Chidambaram also sought to address concerns of foreign investors saying there is no intention of capital controls and that the issues would be revisited as soon as the rupee stabilized.

Last week, the Reserve Bank of India restricted how much its citizens and companies can invest abroad raising fears of outright capital controls that would further undermine the confidence of foreign investors.

The fiscal deficit will be kept at 4.8 per cent of GDP and the current account deficit will be restricted to 3.7 per cent of GDP, Mr Chidambaram reiterated. The deficit will be fully financed, he added.

Mr Chidambaram also said that all options are open before the government as far as the rupee is concerned. These options include issuance of sovereign bonds, he added.

The FM’s address is seen as another attempt at effective communication with markets. The rupee’s slide has hit stock markets and many analysts have pointed out that the central bank’s polices and statements have created confusion.

Thursday was the sixth straight day of decline for the rupee. It fell as much as 2.2 per cent to 65.56 to the dollar to a record low on Thursday, after Federal Reserve minutes hinted that the U.S. was on course to begin tapering stimulus as early as next month and as foreign investors become sellers of Indian stocks.

In an ominous sign for Asia’s worst-performing currency this year, overseas investors who had been net buyers of Indian stocks so far in 2013 headed for the exits this week, selling a net $500 million worth of shares in the four sessions through Wednesday.

Foreigners have also sold a net $1.3 billion of Indian government and corporate bonds so far this month.

The Reserve Bank of India’s efforts to support the currency have failed to do so but have sent bond yields surging, pushing up borrowing costs and undermining an economy that grew at its weakest in a decade in the last fiscal year to March 2013.

In what was seen as a partial roll-back that some market participants say sent a mixed message, the RBI late on Tuesday took steps to support a bond market which has been bludgeoned by its rupee defence steps.

Some analysts said the move was similar to the Fed’s "Operation Twist" begun in 2011 to buy long-end bonds.