NEW DELHI: India's rupee rebounded Tuesday after the central bank raised some interest rates to defend the currency, while the government insisted the move would not derail stumbling economic growth.
The bank, in its most aggressive step to avoid a rupee rout, raised two short-term rates late Monday to ease pressure on the currency after it tumbled to a lifetime low early last week.
The rupee has been hit by a flight of capital due to a weak economy and fears that US policymakers will pare a stimulus package that has triggered vast investor flows to emerging markets.
The bank's actions are to "stabilise the rupee", Finance Minister P. Chidambaram told an audience of venture capitalists in New Delhi late Tuesday.
"These measures are short-term and should not be interpreted as a prelude to a tightening of (benchmark) policy rates -- these are measures to quell speculative activity," he added.
They "do not affect our commitment to growth," he said.
"We want the rupee to stabilise so that we can get on with the business of attracting investments to the country," he said.
The rupee's woes are the latest blow for the scandal-tainted Congress-led government, which is desperate for an economic recovery as it seeks a third term with general elections due by May 2014.
The currency bounced higher, gaining nearly one percent against the dollar to 59.32 rupees following the bank's move.
The closing level was nearly two rupees above the currency's all-time low reached on July 8 of 61.21 to the dollar.
But shares fell nearly one percent as the bank's liquidity tightening dashed hopes of cheaper borrowing to spur the economy.
Chidambaram reaffirmed he expects growth this year to be at least six percent, after the economy expanded by a decade low of five percent last year.
But Sonal Varma, economist at Nomura Securities, warned there was a "risk the (tightening) measures could backfire".
"India's growth is already very weak and tighter domestic liquidity will worsen the financial conditions for corporates and banks, hurting asset quality and the growth outlook," she said.
The Asian Development Bank on Tuesday cut its India growth forecast this year to 5.8 percent, from 6.0 percent.
Analysts said the central bank's next step could be a rise in benchmark borrowing rates -- despite the struggling economy -- if the rupee resumed its downward slide.
As part of his pep-talk to business to woo vitally needed funds to build infrastructure, Chidambaram said India was rapidly moving to clear roadblocks to investment projects and ease its infamous red tape.
But in an embarrassing development, hours before he spoke, South Korean steel giant Posco scrapped a $5.3-billion deal to build a steel plant in the southern state of Karnataka due to land acquisition delays and local opposition.
Posco said it was still sticking with a separate project agreed nearly a decade ago to build a $12-billion steel plant project in Orissa state. The project has still to get underway due to local protests.
"This is an example that doing business in India is tough," said Sonam Udasi, head of research at IDBI Capital.
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