India’s rupee skids to new record low against dollar

MUMBAI: India’s rupee tumbled to a new record low against the dollar, hitting the symbolic 65 level, as economists urged the government to focus on reforms to boost confidence instead of quick-fix solutions.
The currency, which has hit record lows for five straight trading days, slumped to 65.56 to the dollar as uncertainty about the future of the US stimulus program added to growing fears about the state of the Indian economy.
The rupee has lost about a fifth of its value this year and there are doubts over whether policymakers are in control of the situation, which analysts now routinely refer to as a crisis.
“Unless reforms related to growth and lowering the current account deficit are addressed, things will not improve,” said economist Devendra Pant with India Ratings, part of the Fitch ratings group.
Investors are concerned that the US Federal Reserve will begin winding down its bond-buying scheme, which has helped fuel an investment splurge in Asia’s emerging markets.
India has a large current account deficit which must be funded with foreign capital and the country is seen as one of the most vulnerable among emerging markets whose currencies are under pressure globally.
Pant said the government needed to find ways of boosting foreign direct investment, which plunged to $36.8 billion last year from $46.5 billion the previous year.
Since June 1 — after the US Fed signalled a tapering of its stimulus — overseas funds have pulled out nearly $12 billion from India’s stock and debt markets.
The Reserve Bank of India (RBI) and the government have been trying to stabilize the rupee for months by announcing measures such as hiking short-term interest rates and imposing capital controls.
But the measures have failed to halt the plummet and this week the central bank changed tack, announcing it would inject 80 billion rupees ($1.26 billion) into the banking system by buying back long-term government bonds.
The move was aimed at making more credit available to boost economic growth, which is at a 10-year low of 5.0 percent.
“The government and RBI need to focus on reforms rather than short-term quick fixes (for the rupee),” said Shubhada Rao, chief economist with private Yes Bank.
She said one option the RBI has is to launch a bond targeted at Indians overseas, which could raise an estimated $10-12 billion.
If the crisis worsens the country could be forced to go to the International Monetary Fund to borrow funds in a repeat of its 1991 balance of payments problems, which were considered a national humiliation.
Indian Finance Minister P. Chidambaram has in recent weeks promised to reduce the deficit, stabilize the rupee and reduce imports, but this has not eased global rating agencies’ concerns over the country’s weak economic conditions.
Dealers said they feared the rupee could weaken further — with Deutsche Bank analysts forecasting on Wednesday that the rupee could fall to 70 to the dollar.
Minutes from the US Fed’s July policy meeting released Wednesday showed board members had differing opinions on when to wind down the $85 billion a month bond-buying.
Some back a “taper” as soon as next month, while others said the bank needed to see more evidence the US economy was strong enough.