India flags need to retain stability as Fed risk hurts rupee

Currency Speculators

“It’s a considered policy of the RBI that while we increase the interest rates at the short end in order to make it difficult for the speculators, we try to keep interest rates at the long end lower in order to promote growth and investment,” Chidambaram said.

The current-account gap may narrow in 2013-2014 from the record 4.8% of gross domestic product in the 12 months ended March, while remaining “much above” the sustainable level of 2.5% of GDP, the RBI said.

Chidambaram said last week curbs on gold and silver imports and plans to compress inward shipments of non-essential items will trim the current-account gap to $70 billion, or 3.7% of GDP, this fiscal year. He said today the shortfall may be less than $70 billion.

Subbarao said India’s foreign exchange reserves are adequate to manage the current situation.

Bad Loans

The central bank also said in the report that “utmost attention” is needed to contain rising financial stability risks from deteriorating asset quality at banks.

The government began reforms in September 2012 to restrain the budget deficit, accelerate stalled infrastructure projects and ease restrictions on foreign investment in industries from aviation to retailing.

The administration is striving to avert a credit-rating cut that may hurt India’s ability to fund the trade imbalance.

Fitch Ratings said today recent pressures on India’s markets aren’t a trigger for rating action at this point.

Consumer prices rose 9.64% in July from a year earlier, the second-fastest in the Group of 20 major economies. Wholesale prices advanced 5.79%, exceeding the central bank’s comfort zone of about 5%.

India’s $1.8 trillion economy will expand 5.5% in the year through March 2014, central bank estimates show, compared with a decade-low 5% in the previous 12-month period as investment moderated.

About 826 million of India’s 1.2 billion people live on less than $2 per day, according to the World Bank.

“Recovery is possible and can take shape later in 2013-2014, but is predicated on better governance, the removal of supply constraints and maintenance of stability,” the central bank said. Healthy monsoon rains augur well for agriculture and rural demand, the RBI said.

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