The rupee touched a new low of 65.93 to the dollar on Tuesday, breaching past its earlier record of 65.56 last week, as the Lok Sabha cleared the Food Security Bill that would cost about Rs. 1.3 lakh crore to the exchequer.
Analysts say the Bill, which seeks to provide foodgrains at highly subsidised rates to an estimated 810 million people across India, will only widen deficit and fuel inflation due to increased government spending.
However, finance minister P Chidambaram insisted on Tuesday that the government can afford a vast new food programme for the poor despite concerns about its impact on the strained public finances.
The Food Security Bill is a key part of the ruling UPA government’s strategy to win a third term.
Chidambaram said the government would stick to its fiscal deficit target for the year, while announcing cabinet approval of power and infrastructure projects worth Rs. 183,000 crore.
“After providing for the food security bill, we will remain within the limit I have set for myself in the budget,” Chidambaram told reporters at a press conference in the capital.
He reiterated that a budget deficit of 4.8% of gross domestic product (GDP) remained a “red line”, which would not be crossed this year.
However, the comments failed to sway investors, with market watchers sceptical about India's ability to attract funds for infrastructure projects in an economy growing at a decade low of 5%.
“The Food Security Bill is the key reason for the rupee's fall today. It would open floodgates for (credit) ratings downgrades, if the fiscal deficit is not reined in,” said Ashtosh Raina, head of foreign exchange trading at HDFC Bank.
The chief India economist with Barclays Capital, Siddhartha Sanyal, agreed. “The broad sentiment for the rupee is still weak. The food bill will be a strain on the government finances,” he said.
While the government hopes to contain the fiscal deficit to 4.8% of GDP for the year ending in March, fears are growing that it will be tempted to launch a flurry of fresh populist spending ahead of elections which are due by May.
So far in 2013, the rupee has already been beaten down around 15%, despite frantic attempts by the government and the Reserve Bank of India (RBI) to shore it up.
On Tuesday, the rupee had opened at 65 to the dollar as against Monday’s close of 64.30/31.
Indian stock markets were also hit on Tuesday, raising the prospect of further capital outflows, with the benchmark BSE index falling 1.7% and the broader NSE index down 1.9%.
The country's record high current account deficit has already made it particularly vulnerable as global investors brace for the end of the Federal Reserve's period of cheap money, and measures taken so far by policymakers have been inadequate to stem the rout.
Kotak Institutional Equities said there would be “no free lunch,” estimating India's subsidy burden of the plan would end up reaching Rs. 82,700 crore from the budgeted Rs. 60,600 crore.
“There are substantial challenges in procurement, logistics and identification of beneficiaries,” the brokerage said in a note to clients.
Fitch Ratings analyst Art Woo said on Monday it was getting more challenging for India to meet its fiscal deficit target in the current fiscal year ending March 2014 with revenues slowing, in comments made before the lower house of parliament passed the food bill.
Standard & Poor's is the only of the three major credit agencies to have a "negative" outlook on India's "BBB-minus" sovereign credit rating. Any downgrade would put the country in "junk" territory.
India’s benchmark 10-year bond yield dropped 4 basis points at open to 8.30% as the Reserve Bank of India (RBI) announced an open market purchase of bonds but soon edged higher, tracking weakness in the rupee.
Read Mint analysis: Food security bill and the case against it and how it is deeply flawed. Read more
(With inputs from Reuters, AFP and PTI)
Source : hindustantimes.com
Analysts say the Bill, which seeks to provide foodgrains at highly subsidised rates to an estimated 810 million people across India, will only widen deficit and fuel inflation due to increased government spending.
However, finance minister P Chidambaram insisted on Tuesday that the government can afford a vast new food programme for the poor despite concerns about its impact on the strained public finances.
The Food Security Bill is a key part of the ruling UPA government’s strategy to win a third term.
Chidambaram said the government would stick to its fiscal deficit target for the year, while announcing cabinet approval of power and infrastructure projects worth Rs. 183,000 crore.
“After providing for the food security bill, we will remain within the limit I have set for myself in the budget,” Chidambaram told reporters at a press conference in the capital.
He reiterated that a budget deficit of 4.8% of gross domestic product (GDP) remained a “red line”, which would not be crossed this year.
However, the comments failed to sway investors, with market watchers sceptical about India's ability to attract funds for infrastructure projects in an economy growing at a decade low of 5%.
“The Food Security Bill is the key reason for the rupee's fall today. It would open floodgates for (credit) ratings downgrades, if the fiscal deficit is not reined in,” said Ashtosh Raina, head of foreign exchange trading at HDFC Bank.
The chief India economist with Barclays Capital, Siddhartha Sanyal, agreed. “The broad sentiment for the rupee is still weak. The food bill will be a strain on the government finances,” he said.
While the government hopes to contain the fiscal deficit to 4.8% of GDP for the year ending in March, fears are growing that it will be tempted to launch a flurry of fresh populist spending ahead of elections which are due by May.
So far in 2013, the rupee has already been beaten down around 15%, despite frantic attempts by the government and the Reserve Bank of India (RBI) to shore it up.
On Tuesday, the rupee had opened at 65 to the dollar as against Monday’s close of 64.30/31.
Indian stock markets were also hit on Tuesday, raising the prospect of further capital outflows, with the benchmark BSE index falling 1.7% and the broader NSE index down 1.9%.
The country's record high current account deficit has already made it particularly vulnerable as global investors brace for the end of the Federal Reserve's period of cheap money, and measures taken so far by policymakers have been inadequate to stem the rout.
Kotak Institutional Equities said there would be “no free lunch,” estimating India's subsidy burden of the plan would end up reaching Rs. 82,700 crore from the budgeted Rs. 60,600 crore.
“There are substantial challenges in procurement, logistics and identification of beneficiaries,” the brokerage said in a note to clients.
Fitch Ratings analyst Art Woo said on Monday it was getting more challenging for India to meet its fiscal deficit target in the current fiscal year ending March 2014 with revenues slowing, in comments made before the lower house of parliament passed the food bill.
Standard & Poor's is the only of the three major credit agencies to have a "negative" outlook on India's "BBB-minus" sovereign credit rating. Any downgrade would put the country in "junk" territory.
India’s benchmark 10-year bond yield dropped 4 basis points at open to 8.30% as the Reserve Bank of India (RBI) announced an open market purchase of bonds but soon edged higher, tracking weakness in the rupee.
Read Mint analysis: Food security bill and the case against it and how it is deeply flawed. Read more
(With inputs from Reuters, AFP and PTI)
Source : hindustantimes.com
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