HONG KONG — The beleaguered Indian rupee continued its steep descent on Wednesday, hitting a record low of 64.54 to the dollar amid global nervousness about the timing and scale of the Federal Reserve’s likely scaling back of its bond-buying program.
The 2 percent drop took the Indian currency’s decline since early May to 20 percent, raising worries about the impact it will have on the country’s substantial import bills and on an already large current account deficit.
Indian stocks also dropped. The Sensex index closed down 1.9 percent and the Nifty ended 1.8 percent lower. Both indexes have dropped more than 10 percent since late July.
Signs that the American central bank will reduce its bond purchases soon set off big outflows of cash from emerging markets around the world in May, and the reverberations continued Wednesday. A drop in the Indonesian currency sent the rupiah to 10,755 per dollar, its lowest level since April 2009. The South African rand and Brazilian real likewise are now at their weakest level since early 2009. Indonesia also has a large current account deficit.
In India, however, the rupee’s latest decline comes on top of a slide that began in 2011, when mounting signs of reform gridlock began to cast a serious pall over the once-rosy India story. In total, the rupee has now sagged more than 40 percent since mid-2011, and many analysts warn that it could fall even further.
The Indian government, scrambling to halt the slide, have in recent weeks rushed out measures like higher import duties on gold and silver and restrictions on the amount that local companies can invest overseas without seeking approval. The Reserve Bank of India also appeared to have intervened in the currency markets on Wednesday to stem the rupee’s fall, Reuters reported, citing traders.
So far, however, these efforts have not succeeded in restoring investor confidence, which had already been undermined by slowing growth and by the prospect that elections next year may handicap efforts to push through much-needed structural reforms.
“Rupee sentiment is very fragile,” Brian Jackson, global currency strategist at Coutts, wrote in a research note. It is hard to see the central bank “being able to control the rupee’s fall without further impeding growth, either by pushing up bond yields or making it more difficult to access bank financing,” he added.
Kim Eng Tan, senior director of Asia-Pacific sovereign ratings at Standard Poor’s, said in an e-mailed statement that recent government measures to restrict capital outflows had increased uncertainty among foreign and domestic investors.
If this continues, he said, “business financing conditions could deteriorate further and investment growth could slow further. India’s long-term growth prospects could weaken on a sustained basis, with negative implications for the sovereign credit fundamentals. It is, however, too early now to tell if this scenario will come to pass. This will be largely dependent on policy makers’ reactions to these latest developments. We maintain a negative outlook on India’s BBB- sovereign credit ratings.”
Article source: http://www.nytimes.com/2013/08/22/business/global/rupee-suffers-another-record-low.html?partner=rss&emc=rss