The partially convertible rupee was the worst performer among Asian currencies last year, losing close to 16 percent against the U.S. dollar as foreign investors pulled out of Asia’s third-largest economy on worries over its large fiscal deficit, stubbornly high inflation and slowing growth.

“Rupee depreciation is largely driven by global factors and the pressure would continue until there is a durable solution to the sovereign debt problem in Europe,” Mukherjee said in a speech at a business awards function.

The currency closed stronger on Friday, ending the week with a 0.7 percent gain as foreign investors bought local debt, but analysts say the local unit will remain under pressure in the near term. It ended on Friday at 52.7150/7250 to the dollar, 0.5 percent stronger than Thursday’s close of 52.98/99.

A weak rupee is expected to keep overall inflation high by pushing up the cost of imported items, offsetting a moderation in food prices.

India’s headline inflation has been steadfast above 9 percent for a year. But Mukherjee said that figure was likely to come down to 6-7 percent by March.

The Reserve Bank of India (RBI) has raised interest rates 13 times since March 2010 by a total of 375 basis points to rein in price pressures.

“… there are some clear signs of inflation moderating in the coming months,” Mukherjee said.

“Going forward, I am sure that RBI will take into account the important concern of balancing the targets of controlling inflation and keeping up growth and employment generation.”

FISCAL CONCERNS

The Indian economy has been slowing amid mounting global uncertainties and high interest rates and policy paralysis at home. The pace of economic expansion slowed down to 6.9 percent in the quarter through September, its weakest pace in over 2 years.

Annual economic growth in fiscal 2011/12 that ends on March 31 is expected to be around 7.5 percent, far lower than the 9 percent forecast made in last year’s budget.

With a slowing economy hitting tax revenues and a programme to sell shares in state-run firms getting derailed due to depressed market conditions, New Delhi has been forced to increase its market borrowing for the current fiscal year by 22 percent from the budgeted target.

This in turn has called into question the government’s ability to restrict the fiscal deficit for 2011/12 at the budgeted target of 4.6 percent of gross domestic product. Several government officials, including Mukherjee, have conceded there will be a slippage on that target, but not by a wide margin.

“Performance during the first half on the fiscal front poses some risks in both receipts as well as expenditure estimates,” he said.

“In the medium to long term we are committed to prudent management of our fiscal situation … ”

Most analysts expect India’s 2011/12 federal fiscal gap to be an almost 1 percentage point higher than the original target.

Source: Reuters