Rupee may not rise as sharply as in 2007, says Chidambaram

Rupee may not rise as sharply as in 2007, says Chidambaram
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First Published: Sun, Mar 02 2008. 11 26 PM IST
Updated: Sun, Mar 02 2008. 11 26 PM IST
New Delhi: India’s rupee is unlikely to appreciate as sharply this year as last year, when its gains were “extraordinary”, and the economy will grow close to 9%, the finance minister said on Sunday.
P. Chidambaram, speaking in an interview two days after unveiling Budget 2008, said he aimed to contain inflation at around 4%, but this would depend on how world food and commodity prices panned out in the coming year.
The rupee gained more than 12% against the dollar in 2007, largely driven by huge capital inflows, rising interest rates and a weakening dollar, hurting some labour-intensive export sectors and complicating the management of monetary policy.
“I don’t know whether the rupee will appreciate, but even if it does, I don’t think it will appreciate as sharply as it did in 2007,” he said. “2007 was an extraordinary appreciation of the rupee.”
The partially convertible rupee closed at 40.01/02 a dollar on Friday. It hit a near-decade high of 39.16 last November, driven up by portfolio inflows into the stock market, but last month slipped to a five-month low of 40.25.
The $1 trillion (Rs39.9 trillion) Indian economy is the third largest in Asia and the fastest growing major one in the world after China. Gross domestic product (GDP) grew at 9.6% in 2006-07 and is on course to slow slightly to an estimated 8.7% in the year ending 31 March.
The pace has been accompanied by rising inflation.
Wholesale price inflation hit a two-year high of 6.7% in early 2007 and is again on the rise, with a mid-February 2008 reading of 4.89%, its highest in eight months. “We would like a real GDP growth of nine-plus, which means we must contain inflation at 4% or below. That is the ideal situation,” Chidambaram said. “But the ideal is an aspiration. What we will achieve is, I hope, pretty close to the ideal.”
But the Economic Survey has said that keeping expansion at 9% a year would be a challenge due to inflation and infrastructure constraints. It warned that raising growth to double digits, which has been a mantra of this government, would be even harder.
Chidambaram announced a controversial plan in the Budget to write off Rs60,000 crore of small farmers’ debts to banks in a move analysts say is aimed at wooing voters ahead of elections, due by May 2009.
He has declined to say exactly how the write-off will work and parried the question again on Sunday when asked if he would use some form of bond issue to fund the waiver.
By law, the government has to bring the fiscal deficit down to 3% of GDP in 2008-09 and Chidambaram has a more aggressive target of 2.5% for the coming year from an estimated 3.1% for this fiscal year.
But off-budget items such as oil bonds issued to state-run retail fuel firms, have been creeping up as the price of oil worldwide has soared. India, which puts a ceiling on retail fuel prices, has kept them down by issuing special bonds.
Analysts have flagged the off-budget items as a potential fiscal concern, alongside a potentially substantial increase in salaries to government employees. The minister said off-balance-sheet items for 2007-08 totalled about Rs18,000-19,000 crore, or about 0.3% of GDP.
“Even if you add 3.1 to 0.3, that comes to 3.4. As we incur an off-budget liability, we will certainly show it in the documents that are published from time to time,” Chidambaram said.
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First Published: Sun, Mar 02 2008. 11 26 PM IST