The finance minister's attempt on Thursday to win back market confidence by pledging new reform measures and talking up the economy disappointed investors who were hoping for concrete measures to stop the rupee's slide to record lows.
P Chidambaram pledged to lift caps on foreign direct investments and revise locally produced gas prices and power tariffs in a bid to narrow a current account deficit that hit a record high of 6.7 percent of gross domestic product in the October-December quarter.
Chidambaram's promises come after Fitch Ratings on Wednesday returned India's sovereign outlook back to "stable" from "negative" a year after its downgrade, in a surprise endorsement of the government's fiscal efforts.
Yet investors believe these longer-term measures are unlikely to support a rupee being punished harder than other emerging market currencies as part of a sell-off in the region due to India's hefty current account deficit.
Indian regulators on Wednesday also announced an increase in investment limits for government debt, but only for long-term funds overseas. That is seen as unlikely to stop net sales of more than $3 billion from debt markets over the past two weeks from overseas investors.
Ashtosh Raina, head of foreign exchange trading at HDFC Bank, said Chidambaram's announcement in a news conference had been disappointing.
"The only measure was the FII debt limit hike announced yesterday, but with FIIs selling EM debt, that doesn't help much either," Raina said, referring to foreign institutional investors.
The rupee has slumped to a record low of 58.98 per dollar this week, adding to concerns about the prospects of a recovery in Asia's third largest economy.
Although wholesale inflation, with latest numbers due on Friday, is expected to ease further, consumer prices remain high. The Reserve Bank of India (RBI) is widely expected to leave interest rates unchanged on Monday especially given the weak rupee and the wide current account deficit.
"My appeal to everyone is we have to take a long-term view of what's happening in India and what will be the results we will achieve over a period of time," Chidambaram told the media briefing.
"I think significant results have been achieved in last nine months and I'm looking forward to more reforms."
"NO NEED TO PANIC"
However, analysts say a recovery in the rupee would be made harder without concrete action. The rupee closed at 57.98 to the dollar from a close of 57.79/80 on Wednesday. It had earlier hit 58.55/56 per dollar, not far from a record low of 58.98 hit on Tuesday.
The 10-year bond yield rose 5 basis point to 7.34 percent in the day, having risen 7 bps this month.
Traders expect the RBI may need to step in should the rupee approach record lows again after last intervening on Tuesday.
India could take additional measures such as targeting dollar demand from oil companies, but these stronger measures are seen as unlikely given a perception among policy makers the rupee falls are being driven by global factors.
Oil and gold contribute to about 45 percent of India's total imports, the two biggest factors for the record-high current account deficit.
Chidambaram urged investors to stop buying gold and added that gold imports had declined from an average of $135 million per day in the first half of May to $36 million in the second half of that month.
"Practically no new imports have taken place in June due to stockpiles lying with bullion dealers. Gold imports will be in lesser quantities this month," said Bachhraj Bamalwa, former chairman of All India Gems and Jewellery Trade Federation.
Bamalwa estimated $36 million to be the value of less than 1 tonne of gold imports.
Chidambaram reiterated that there was no need to panic about the rupee, echoing comments from other officials. He added the government would plough ahead, reviewing sectoral caps for foreign direct investors in all sectors, including defence.
Asia's third largest oil consumer is also seeking to raise prices of locally produced gas on the basis of a complex formula suggested by a panel headed by an adviser to the prime minister.
The government is also looking to pass a measure allowing cash-strapped power utilities to pass on the higher cost of imported coal to customers.
Yet whether India can implement these steps is uncertain.
The government's ruling minority coalition also faces state elections due before a general election next year, putting into doubt whether it can keep fiscal discipline and pass reforms.
Another key concern remains the implementation of reforms.
India opened up the retail sector last year but toughened some of the rules for potential foreign investors such as Wal-Mart Stores. Meanwhile, its increase in diesel prices last year cost it a partner in the ruling coalition.
Copyright Thomson Reuters 2013
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