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Union Finance Secretary Montek Singh Ahluwalia's statement in Delhi that the rupee would stabilise helped break the rupee's plunge to a 19-month low of Rs 36.70 against the US dollar on Monday. The Reserve Bank of India's efforts to stop the fall in a volatile foreign exchange market which saw a huge corporate demand for the dollar came to nought.

The rupee thus depreciated by 11 paise in the spot market and in the forward segment by 31 paise for August dollars on Monday.

Ahluwalia said on Monday, "I am hopeful that we will see a situation where exchange rate markets are quite stable. We are not running a fixed exchange rate system and some little turbulence will occur here and there."

To stabilise the rupee, the RBI sold substantial outright spot and forward dollars and also transacted buy-sell swaps. The RBI would have sold at least $300 million during the day to check the higher forward premia, said a market dealer, with the aim of bringing it down.

The RBI's intervention on Monday affected several nationalised banks. Normally, it affects only the State Bank of India and some of the bigger foreign banks. The dollar was in demand as corporates sought to cover their positions, including several medium and small corporates who have entered the market.

Moreover, in the forwards market, a series of contract cancellations by exporters has pushed down the supply of dollars. Corporates which had availed of foreign currency loans have started covering their exposures.

Thus, with importers covering and exporters preferring to kept their dollars abroad, the market was quick to absorb the dollars released by the RBI Reserve Bank, which had minimal effect on the market.

The spot market saws a steady depreciation throughout the day, while the forwards moved in a sea-saw fashion affected by RBI's buy-sell and by Ahluwalia's statement.

The premia moved downwards when the RBI entered the market, and moved up again when the RBI dropped out.

Meanwhile, Montek Singh Ahluwalia said the government is on target to lower its fiscal deficit to 4.5 per cent of GDP this year and still achieve economic growth of about seven per cent, or a bit lower.

He was speaking in response to the RBI's Annual Report for 1996-97 which warned of a swelling deficit that would shoot over the government's target of 4.5 per cent of the GDP. It said government expenditure was likely to overshoot planned spending and revenues could see a decline.

"I don't think there is any reason to think we are off target," he said. "As of now, there is no additional expenditure commitment that is unusual, so we firmly expect that the total expenditure position will not be too far off the budget."

Expressing doubts on infrastructure as a hurdle to growth, he said, "Infrastructure bottlenecks are a problem, but despite them I don't think it will be difficult to expect a growth rate of somewhere around seven per cent or a little lower in the current year," he added.

"What's all the fuss about," asked Ahluwalia, referring to the RBI observations.

But analysts tend to disagree with Ahluwalia, predicting an increase in the fiscal deficit from 5 per cent of GDP in 1996/97 to somewhere between 5.2 and 6.0 per cent this year. They cite the lower revenues from tax and import duties as two factors inflating the deficit.

The GDP grew by 6.8 per cent in 1996-97, and averaged seven per cent over the previous three years, according to official figures.

But an economist with a brokerage firm in Bombay said he figured that last year's GDP growth slowed to 6.3 per cent from 7.1 per cent in 1995/96, and was likely to dip further to 6.0 per cent this year.

Ahluwalia said he did not see overspending as a problem. "As of now, there is no additional expenditure commitment that is unusual, so we firmly expect that the total expenditure position will not be too far off target," the finance secretary told a conference in New Delhi. The RBI, however, said India needs to swing the axe faster on a forest of subsidies to tame the deficit and put momentum back in the economy.

The main thrust of the argument is that India needs to spend money on the right things. Spending on infrastructure would pull in private investment in these vital areas, which could revitalise growth, claim analysts.

They point to China's strategy of aggressively cutting subsidy payments and import tariffs.

Many feel the hike in the price of diesel by more than 20 per cent and freeing it from an administered pricing system was a step in the right direction. However, more such steps are needed, the analysts add.