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Rupee recovers after hitting record low of 68.75

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The rupee breached past 68 per dollar and shares tumbled on Wednesday on growing worries that foreign investors will continue to sell out of a country facing stiff economic challenges and volatile global markets. The Indian unit recovered later.

Foreign investors sold nearly $1 billion of Indian shares in the eight sessions through Tuesday - a worrisome prospect given stocks had been the country's one sturdy source of capital inflows, although net purchases so far this year still total $12 billion.

The partially convertible rupee hit a record low of 68.75, down 3.7 per cent on the day, after posting its biggest daily percentage fall in 18 years on Tuesday. At 3.08 p.m., the unit was trading at 67.67 per dollar.

"It is just impossible to put any realistic value to the rupee any more," said Uday Bhatt, a forex dealer with UCO Bank.

The need to attract foreign capital is critical for a country whose record high current account deficit is a key reason behind the rupee's slump. Yet policymakers have consistently struggled to come up with measures that can convince markets they can stabilise the currency and attract funds into the country.

That failure is becoming an increasing source of tension for India at a time when fears of a possible U.S.-led military strike against Syria are knocking down Asian markets, with prospect that the Federal Reserve will end its period of cheap money as early as next month further raising concerns.

In its latest initiative, the government late on Tuesday proposed setting up a task force to look into currency swap agreements, a measure analysts said could bring some relief if carried out in time by reducing market demand for dollars or other major currencies.

"Lets see what the authorities do, but if the government can come out with some really big currency swap arrangement with some countries, that can be a strong positive," Bhatt said.

The rupee has now fallen around 19 per cent so far this year, by far the biggest decliner among the Asian currencies tracked by Reuters.

LACKING CONFIDENCE

The rupee has failed to rebound despite a slew of measures by policymakers, including extraordinary measures by the Reserve Bank of India to drain liquidity unveiled last month and action to curb gold imports and cut on India's oil import bill.

Whether that can be enough remains in doubt given bond yields are surging, threatening to raise borrowing costs across the already slowing economy, while global prices of oil and gold - the country's two biggest imports - have surged this week.

Foreign investors have started to pare down their equity positions, having sold a net $3.5 billion in stocks since the start of July.

In bond markets, foreign investors have sold more heavily, with outflows reaching $4.5 billion so far this year.

Finance Minister P. Chidambaram said on Tuesday the government would need to do more to revive an economy growing at the slowest in a decade and narrow a current account deficit that hit a record high of 4.8 per cent of gross domestic product in the year ended in March.

Those comments came after the government approval of infrastructure projects were overtrumped by concerns about the fiscal deficit after the Lok Sabha this week approved a Rs 1.35 lakh crore plan to provide cheap gain to the poor.

Copyright Thomson Reuters 2013

Story first published on: August 28, 2013 15:16 (IST)

Tags: Indian rupee

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