India: Rupee falls to record low, Central Bank takes bold measures
July 17, 2013
The Indian rupee has weakened sharply against the dollar since May as a result of speculation that the Fed's quantitative easing (QE) program will end earlier than expected. The Indian rupee (INR) traded at 59.5 per USD at the end of June, which was 6.1% weaker than the level observed at the end of the previous month. On 8 July, the rupee intensified its decline and slumped to an all-time record low of 60.7 INR per USD, losing 6.4% of its value compared to the same day of the previous month.
Against this background, the Reserve Bank of India (RBI) took bold action on 15 July to smooth volatility in the currency market and to prevent a disruption to macroeconomic stability. Measures included an increase in short-term interest rates and limitations to bank borrowing from the RBI on an overnight basis. Furthermore, on 18 July the Bank announced an open-market sale of government bonds worth INR 129 billion (USD 2 billion) in a move that aims to drain cash from the economy.
Analysts polled by FocusEconomics are still factoring in the latest developments and expect the rupee to trade at 56.3 INR per USD by the end of this fiscal year. For the fiscal year 2014/15, the panel projects that the rupee will close the year at 55.4 INR per USD.
Author: Ricardo Aceves, Senior Economist