The Indian rupee recovered slightly Thursday following the rebound seen in Asian markets led by positive data from Japan and the US.
The rupee rose to 54.30 against the dollar as market sentiments were rather positive for the day following a reports US industrial production increased by 1.1 percent in April, compared to the previous month. Data from Japan, which showed the country’s economy rose 1 percent in the first quarter compared to the last quarter of the previous year, added to the sentiment.
The rupee had hit a record low of 54.52 against the dollar Wednesday, as high rate of inflation and weak economic outlook put the currency under pressure. The widening current account and fiscal deficit have also added additional pressure. India's fiscal deficit is 5.9 percent of GDP and the current account deficit is 3.6 percent, figures that don't augur well for the country's economic growth.
The rupee has already shed all the gains it made in the first two months of the year. Analysts are of the opinion that the Indian government's ability to implement policies has weakened due to its slow and complex decision-making process.
On a positive note, last month, the Reserve Bank of India (RBI) surprised markets with a 50 basis point cut in the main interest rate, the first policy easing in three years, as focus turned to lifting lending controls and tackling a slowdown in the economy.
However, India's inflation rose unexpectedly in April compared to last year, denting prospects of further loosening of the monetary policy to regain the economic growth momentum. The benchmark wholesale-price index climbed 7.23 percent in April, up from 6.89 percent in March.
With the current political gridlock and elections due to be held by May 2014, concrete fiscal and public sector reforms are not expected any time soon. The economy grew 6.1 percent in the quarter ending Dec. 31, 2011. This was the slowest growth in nearly three years and was a major slowdown from July-September last year when the GDP growth was 6.9 percent.
Hopes for a rebound in growth have also been dampened by recent business surveys and output data, as highlighted by the 3.5 percent fall in industrial production in March compared to last year. Also the government is unwilling to raise fuel prices and its proposed retrospective tax measures have unsettled investors.