Cantillon: Rupee woes a cause of concern

An East India Company one rupee coin dating back to 1835. REUTERS/Anindito Mukherjee

An East India Company one rupee coin dating back to 1835. REUTERS/Anindito Mukherjee


Five years ago the fast-growing Indian economy had added a record $92 billion to India’s foreign reserves in a single year. Conditions have since changed markedly for the worse.

On Tuesday Palaniappan Chidambaram, the Indian finance minister, outlined a 10-point plan to save the economy, but there was light on the horizon.

“I see some glimmer of hope,” he told parliament.

By yesterday evening, a renewed collapse of the rupee to close just below RS69 to the dollar had made even Mr Chidambaram’s tentative expression of confidence seem wildly optimistic.

Mr Chidambaram and Raghuram Rajan, the incoming central bank governor who takes office next week, now face an array of intractable and interconnected financial difficulties exacerbated by the decline of the rupee and the impact of the Syrian war on the dollar prices of India’s two main imports – oil and gold.

Indian inflation, at nearly 10 per cent, could rise by two or three percentage points if commodity prices and exchange rates remain at these levels, economists say.

The cost to the exchequer of fuel subsidies is soaring, which threatens to derail the government’s target of limiting its central budget deficit to 4.8 per cent of gross domestic product in the current financial year.

High international oil and gold prices also make it harder to cut the current account deficit to the $70bn target Mr Chidambaram has set for this year, down from $88 billion in the previous 12 months.

For business, the rupee’s
sharp fall increases the strain on
Indian companies with foreign currency debts, weakens the banks and complicates the picture for global businesses
operating in India, whose
contributions to revenues and
profits at their parent companies
have been eroded.