India: Rupee tumbles yet again, reaching the latest in a series of record lows
August 20, 2013
The Indian rupee continues its relentless decline against the U.S. dollar, reflecting speculation that the Fed may soon wind down its monetary stimulus as well as increasing disappointment over the Indian government's economic measures to calm financial markets. The Indian rupee (INR) traded at 60.9 per USD at the end of July, which was 2.5% weaker than the level observed at the end of June. Moreover, the Indian currency appears to be in free fall having reached yet another record-low of INR 64.1 per USD on 21 August and losing 8.0% of its value over the same day in the previous month.
A series of interventions by the Reserve Bank of India (RBI) aimed at tightening cash conditions beginning on 15 July have not succeeded in stemming the rupee's plunge. The impact of these measures on the rupee was short-lived. Meanwhile, the simultaneous cash crunch increased interest rates in the economy as banks raised deposit and lending rates, thus further damaging prospects for recovery in the slowing economy. Against this backdrop, the RBI decided to inject liquidity into the banking system, a move that partially reversed the previous tightening measures. On 20 August, monetary authorities announced that the Bank would repurchase INR 80 billion (USD 1.3 billion) of long-term government bonds, along with other measures to ease pressure on banks.
The RBI's move follows a series of other minor interventions to support the rupee, leading to doubts about the Central Bank's overall approach. These measures may provide only temporary relief, however, as market participants remain focused on the structural weakness behind the rupee: chronic current account and fiscal deficits, faltering economic growth, and the government's inability to introduce substantial economic reforms. Markets remain cautious on the currency's outlook, as further measures are expected when the newly-appointed RBI Governor Raghuram Rajan takes over in September.
Analysts polled by FocusEconomics are still factoring in these developments and expect the rupee to trade at 58.2 INR per USD by the end of this fiscal year. For the fiscal year 2014/2015, the panel projects that the rupee will close the year at 57.9 INR per USD.
Author: Ricardo Aceves, Senior Economist