India looks to foreign help to boost flagging rupee

Lisa Smith, BA (Hons), CeFA

India has switched the tap on for foreign investment to boost the rupee, after the currency has tumbled 25% against the US dollar in a year.

On foreign exchange markets, the rupee is trading at around 57 to the dollar.

Meanwhile, India’s GDP growth was a sluggish 5.3% in the first three months of 2012 – the slowest rate posted for almost a decade.

To try to stem the tide, the Reserve Bank of India is letting overseas investors inject cash in to mutual fund schemes with 25% of assets in infrastructure and increase their stakes in government bonds.

The India government enhanced the foreign investment bond limit by $5 billion to $20 billion.

Other eased rules included increasing the cap on foreign investment by raising the commercial borrowing for manufacturing and infrastructure to $10 billion.

Within India, the bank has resisted calls to cut official interest rates in fear of triggering a surge in inflation.

The weak currency and downturn has already led to a higher cost of living.

Ratings agency Fitch has branded the Indian economic outlook as negative, explaining analysts had detected “heightened risks” to growth.

“Growth will gradually deteriorate if further structural reforms are not hastened,” said a spokesman.

Standard & Poor’s also cautioned India may lose its investment-grade status.

Analysts urged India’s policymakers to boost confidence among investors and improve the country’s investment climate, rather than relying on short-term measures to support the rupee.

The central bank measures are unlikely to lead to any major changes in the Rupee/US dollar exchange rate in the short term.

Government economic advisor C Rangarajan said: “I think the correction will happen over time, because it will happen only when the capital flows come in. The avenues have been opened.”

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