India struggles to arrest rupee fall as output sinks

India pledged Monday to curtail some imports to narrow a record current account deficit and arrest a sliding currency as a sharp contraction in industrial output underlined the weakness of Asia's third-largest economy.

Industrial output shrank by an unexpectedly large 2.2 percent in June from a year earlier, government data showed, outstripping market forecasts of a 1.2 percent drop.

"Weak domestic demand is weighing on manufacturing production," said Moody's economist Glenn Levine.

The figures came as the government strove to put the once red-hot economy back on track, pledging new steps to narrow the gaping current account deficit -- the broadest measure of trade -- that has alarmed global ratings agencies and driven the rupee to record lows against the dollar.

The central bank has "taken a number of measures to increase short-end interest rates and this has contained the depreciation of the rupee to some extent", Finance Minister P. Chidambaram told parliament.

But "we have to do more to contain the current account deficit, to reduce volatility in the currency market and to stabilize the rupee," he said.

The Reserve Bank of India, the central bank, has said it can only ease high interest rates to spur economic growth once the rupee steadies.

Chidambaram said the government would impose additional measures to reduce imports of gold, silver, oil and some non-essential goods. Gold and oil are the biggest contributors to the current account deficit.

He added the government would allow state-run firms to raise funds abroad through "quasi-sovereign bonds" to help finance the current account shortfall as well as make it easier for non-resident Indians to deposit money in India.

Currency inflows from the steps would reduce the current account deficit this year to $70 billion or 3.7 percent of gross domestic product, down from a record 4.8 percent last year, he said.

But Chidambaram's announcement failed to stem the fall in the currency which ended the day at 61.27 rupees to the dollar, near its record closing low of 61.30 rupees hit last week, as dealers complained about a lack of details.

Prime Minister Manmohan Singh's Congress-led government is struggling to engineer an economic rebound before elections due in the first half of 2014.

But the industrial output data highlighted the depth of India's economic slump.

Manufacturing production, which accounts for three-quarters of the Index of Industrial Production, fell by 2.2 percent in June.

Output of capital goods such as factory equipment -- a signal of investment intentions -- slid by a massive 6.6 percent.

Production of consumer durables -- such as cars and appliances -- tumbled by 10.5 percent.

Figures released separately showed India's car sales slid by over seven percent in July, marking a record ninth straight month of decline as the economic downturn and high borrowing costs kept buyers out of showrooms.

Even if the rupee stabilises, the central bank is still wary about reducing interest rates with consumer inflation running at 9.64 percent, according to other figures Monday.

While the bank has cut long-term rates three times since the start of 2013 after an aggressive hiking spree, credit costs have been pushed up lately by the hike in short-term rates designed to persuade investors to keep their money in India and put a floor under the rupee's decline.

India's economy has been struggling under expensive borrowing costs, strong consumer inflation and a string of graft scandals that have virtually paralysed policymaking and discouraged domestic and foreign investors.

Chidambaram said this month the economy may grow by just 5.5 percent this financial year, down from initial forecasts of at least six percent, after expanding by five percent last year -- the slowest pace in a decade.

One bright spot in Monday's clutch of data was trade figures showing exports rose 11.6 percent in July, helped by the weaker rupee, after sliding nearly five percent the previous month.