Rupee weakness threatens to stoke consumer-price inflation of almost 10%, the fastest in a basket of 17 Asia-Pacific economies tracked by Bloomberg.
The drop has also revived memories of India’s 1990s crisis, when the nation needed an International Monetary Fund loan as foreign reserves waned. Singh said this month growth will speed up and India won’t face a repeat of that turmoil.
India’s reserves of about $278 billion are adequate near term, Moody’s Investors Service said Aug. 19. Fiscal policy remains the weakest aspect of Asia’s No. 3 economy, it said.
The RBI must boost currency holdings to anchor the rupee, and options include a sovereign-bond issue or deposits to tap India’s diaspora, according to Bank of America Merrill Lynch.
Singh’s coalition, beset by graft scandals and seeking support before polls due by May, won parliamentary backing this week for bills providing cheap grains to the poor and assuring fairer terms for farmers when companies buy their land.
Legislation to allow increased foreign investment in the pensions and insurance industries and simplify taxes is pending. Opposition protests over graft have repeatedly disrupted parliament for more than two years.
The government has tried since 2012 to tackle deficits, woo inflows, speed up construction projects and avert a credit- rating cut. The steps range from higher taxes on gold imports to more liberal foreign-direct investment rules.
“The macro-stabilization process which should support the value of the rupee is under way,” Singh said in parliament in New Delhi today. “As the fruits of our efforts materialize, currency markets will recover.”
The government predicts the current-account imbalance may narrow to about $70 billion this fiscal year and targets a budget gap of 4.8% of GDP.
Cooling demand in the nation of 1.2 billion people, about two-thirds of whom live on less than $2 per day, is hampering corporate expansion. Maruti Suzuki India Ltd., India’s largest carmaker, has delayed a plan to build a plant in Gujarat state.
India’s slowdown contrasts with more resilient expansion in neighbors such as China, which grew 7.5% last quarter.
The South Asian nation’s vulnerability is being “clearly exposed by an unfavorable external environment,” said Eswar Prasad, who teaches economics at Cornell University in New York.
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