By Himank Sharma and Rafael Nam
MUMBAI (Reuters) - India's finance minister pledged on Thursday to meet the country's fiscal and current account deficit targets, as fears of the U.S. Federal Reserve reducing its stimulus fuel concern over India's vulnerability to foreign sell-offs.
P. Chidambaram's comments follow those of Reserve Bank of India Governor Raghuram Rajan, who on Wednesday highlighted a fall in core consumer inflation and announced an 80 billion rupee ($1.26 billion) bond purchase.
The rupee slumped this week to a two-month low against the dollar as renewed talk of an early reduction in U.S. stimulus raised concern about the impact on a country that depends on foreign investments to bridge a current account deficit that hit a record high last fiscal year.
The fall in the currency comes as the ruling Congress Party, hit by corruption scandals and a toxic mix of a weak economy and surging inflation, campaigns in five state elections in November ahead of national elections next year.
Some are concerned the government will crank up spending to win votes, threatening a fiscal deficit target of 4.8 percent of gross domestic product for the year ending in March.
"I have said and I repeat it: This year the fiscal deficit will be contained at below 4.8 percent no matter what requires to be done. It will be contained at below 4.8 percent. We will address both the revenue side and the expenditure side," Chidambaram said in a speech to a private bank in Mumbai.
Indian markets have experienced a tough week, with bonds and shares also falling, as stronger-than-expected U.S. jobs data sparked concerns about an early taper of the Fed stimulus.
Markets were also hit hard in the summer by the same fears, sending the rupee to a record low of 68.85 to the dollar, although it has recovered 12.9 percent since then.
Nicholas Spiro, managing director of Spiro Sovereign Strategy said Indian policymakers appeared determined to nip the worsening market sentiment in the bud.
"It is very important that at a time when there is a renewed concern about tapering, it is very important that things don't start to slip again," he said.
AMBITIOUS ON CURRENT ACCOUNT GAP
Fears about India's current account deficit had begun to wane after the country imposed tough restrictions on gold imports, leading to an improvement in the trade gap.
India has also announced a plan to offer currency subsidies to lenders raising money from loans and from Indian citizens abroad, while foreign investors have been snapping up stocks since last month, although they remain sellers of bonds.
Chidambaram this month pledged to keep the current account deficit at $60 billion this fiscal year, well below an earlier estimate of $70 billion. RBI Governor Rajan on Wednesday forecast the deficit could narrow to $56 billion.
"You heard the governor yesterday peg it at $56 billion, let me assure you the governor and I are not in competition to contain it," Chidambaram said on Thursday.
"But if I may share a secret: I'm going to try to do it better that $56 billion and then throw the ball into his court to see what he will say."
The finance minister added that the country would attract $25 billion via the banks raising funds from abroad.
Still, India faces numerous economic and fiscal challenges.
Prime Minister Manmohan Singh's government has been hurt by a string of corruption scandals, and an economy growing at its slowest in a decade at the same time that inflation surges due to longstanding bottlenecks and inefficient supply chains.
Data on Thursday showed wholesale inflation rose to an eight-month high of 7 percent, and came after data on Tuesday showing consumer price inflation accelerated more than expected to 10 percent.
At the heart of the problem is a spike in food prices, a particular worry for a government headed for national elections by May next year.
Singh's Congress Party has staked its re-election bid on an ambitious subsidized food program that aims to cover two-thirds of households, and analysts fear more spending packages.
"The jury is still very much out as to whether India will be able to meaningfully correct its macroeconomic imbalances, it's too premature," said Spiro.
(Additional reporting by Aditi Shah and Subhadip Sircar in MUMBAI, and Manoj Kumar in NEW DELHI; Editing by Hugh Lawson)