NEW DELHI/MUMBAI (Reuters) - The Indian rupee weakened towards a record low on Monday after Finance Minister P. Chidambaram unveiled proposals to narrow the current account deficit in a bid to defend the currency as concerns about the slowing economy deepened.
In parliament on Monday, Chidambaram vowed to contain the current account deficit at $70 billion for the fiscal year ending in March, or an estimated 3.7 percent of gross domestic product (GDP).
That would be well below the record high 4.8 percent seen in the previous fiscal year.
Chidambaram proposed to meet the target with a slew of anticipated measures, such as easing rules on obtaining loans abroad and raising deposits from Indians abroad.
Although a lack of specifics had initially disappointed investors - sending the rupee to 61.30 per dollar and not far from a record low of 61.80 hit last week - Chidambaram followed up with details later in the day that helped soothe some of the concerns.
He said the combined proposals unveiled on Monday would bring in a total of $11 billion this fiscal year, pushing up his estimate of capital inflows for the year to $75 billion.
The rupee's defense has so far hinged on the Reserve Bank of India's risky gambit of draining cash and shoring up short-term interest rates, but both measures have failed to prop up the currency, making government action crucial in investors' eyes.
Yet Manmohan Singh's minority coalition is facing political gridlock ahead of elections due by next year, with the current session of parliament that started earlier this month rocked by tensions with Pakistan across the disputed border of Kashmir and clashes in the Jammu region.
"I want to make it clear that while we have a problem, there is no ground for panic," Chidambaram said in a late briefing with reporters, referring to the current account deficit (CAD).
As widely expected, Chidambaram said India would seek to reduce imports of gold, silver and "non-essential" imports, while also curbing demand for oil.
He also proposed raising funds abroad to boost capital inflows, allowing public sector financial firms to sell debt to finance long-term infrastructure projects, raising money via deposits targeted at Indian citizens abroad, and liberalizing guidelines for external commercial borrowings.
Chidambaram put some numbers to his proposals, as some analysts had expressed skepticism about whether India would be able to contain the deficit to the extent pledged on Monday.
"Bolder measures are required," said Rupa Rege Nitsure, chief economist at Bank of Baroda in Mumbai.
"Given the massive depreciation in the currency, the upward bias in interest rates and the policy uncertainty in the pre-election year, we cannot expect any revival."
India's latest measures on the current account deficit come after data earlier in the day showed the country's exports rose 11.64 percent in July from a year earlier, while imports fell, keeping the trade deficit at $12.27 billion, almost the same as June and in line with expectations.
A weaker rupee should help exports, while government measures to curb imports, including earlier ones that raised duties on gold, could also help narrow the trade deficit.
But the economy remains a key concern, with growth at 5 percent, the slowest in a decade, and analysts said India needed to tackle longer-term fiscal and economic reforms, such as raising fuel prices.
Data late on Monday showed industrial output in June contracted 2.2 percent from a year earlier, nearly twice as much as expected, though at least the consumer price index slowed in July, easing some concerns about inflation.
More worrisome, capital goods production, a barometer for investments in the economy, contracted an annual 6.6 percent in June from a year earlier.
A weak rupee and slowing growth could raise the prospect that more foreign investors will exit India as the Federal Reserve is widely expected to start rolling back its U.S. monetary stimulus as early as next month, denting the appeal of emerging markets.
Foreign investors have sold a net $11.6 billion of Indian debt and equities since late May, when the rupee started its decline.
"Weak domestic growth prospects suggest that portfolio equity inflows and overseas borrowings will be much lower this year. Hence, we expect net capital inflows to slow, which will make financing the current account deficit difficult," Nomura said in a note on Monday.
The RBI unveiled steps on July 15 unveiled steps to raise short-term interest rates and drain cash to shore up the rupee, and announced additional steps on July 23.
It followed up again last Thursday, announcing weekly sales of cash management bills to drain further cash.
Those measures have sent bond yields surging, raising the prospect of higher borrowing costs which could weigh further on the economy. The benchmark 10-year bond yield is up three-quarters of a percentage point since the RBI's first steps last month.
"The RBI has taken a number of measures to increase the interest rate at the short end and this has contained the depreciation of the rupee to some extent," Chidambaram had earlier told parliament, struggling to be heard amid loud protests from some lawmakers.
"However, we believe that we have to do more to contain the CAD to reduce volatility in the currency market and to stabilize the rupee," he added.
Writing by Rafael Nam; Additional reporting by Manoj Kumar, Mayank Bhardwaj and Anurag Kotoky in NEW DELHI & Swati Bhat and Shamik Paul in MUMBAI; Editing by John Mair & Kim Coghill