The Indian government has approved 36 new infrastructure projects in a bid to give the country's ailing economy a boost.
Energy and transport projects worth $29 billion have just been given the go ahead by the Indian government, including oil and gas developments, transport links and new roads.
Finance Minister P Chidambaram said that the government was sending a message that "the investment cycle has restarted, and we are pushing it."
This message could not come soon enough. The Indian currency has dipped to an all-time low against the U.S. dollar and the stock market is experiencing unattractive levels of volatility.
Teera Chanpongsang, portfolio manager at Fidelity specializing in Indian equities, said that while the long-term outlook and growth prospects for India were attractive, he remains concerned over the country's twin deficits, the depreciating rupee and upcoming elections in the middle of next year.
"Oil imports account for around two-thirds of the current account deficit, and gold imports are responsible for the other third," Chanpongsang said. "The government has implemented a duty increase on gold, a limit on how much individuals can bring into the country and which types of companies can import gold. This looks to be slowing down gold imports a little."
With oil imports making up such a large proportion of the current account deficit, Chanpongsang said the rising oil price could prove problematic -- especially while the rupee is weak.
And weak it is. According to Deepak Lalwani, author of the Lalcap India Report, the rupee has been the worst performer among Asian currencies since May, when the U.S. Federal Reserve announced that it might start tapering its quantitative easing.
"The fear for India is that erstwhile inflows will dry up as investors start to shun countries with a high current account deficit, a slowing economy and relatively high inflation," he said. "India ticks these boxes."
Avinash Vazirani, portfolio manager with UK-based Jupiter Asset Management Ltd., said a combination of Indian politics, a rudderless central bank and U.S. tapering fears were all playing their part in driving down the Indian rupee. Vazirani said that the current government was much too focused on legislation that will help it to get re-elected, with the country due to go to the polls by the middle of next year.
"Domestic politics may be playing a part in the rupee's slide, but U.S. monetary policy is also having a significant impact," he said. "The Federal Reserve's US$85billion-a-month bond buying program unleashed a wave of cheap money that found its way into emerging markets where it could earn higher yields than in developed markets. Since the Fed has signalled it would be cutting back on its bond buying once the U.S. economic recovery is on sure footing, investors have been piling out of emerging markets, sending these countries' currencies spiralling down."
He highlighted that Brazil's real, Indonesia's rupiah and Mexico's peso have all fallen sharply against the U.S. dollar -- as well as the rupee.
"With the Federal Reserve still unwilling to set a date on when it will start the tapering of its quantitative easing program, the rupee and other emerging market currencies are likely to remain volatile," Vazirani said.
Chanpongsang said that despite these problems he was confident that GDP growth would hit 5%. "I continue to invest in positions that are long-term winners, such as pharmaceutical companies that will benefit from patent expires in the U.S., IT outsourcing companies and selected high-quality banks in India," he said.
