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Indian rupee hits record low at 61.80, RBI expected to stiffen defence

Aug 06 2013, 16:18 IST
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Unless Prime Minister Manmohan Singh's weak coalition government announces substantial reforms, or resorts to raising debt abroad to attract rapid capital inflows, the rupee is likely to fall further, traders said. Unless Prime Minister Manmohan Singh's weak coalition government announces substantial reforms, or resorts to raising debt abroad to attract rapid capital inflows, the rupee is likely to fall further, traders said.
SummaryThe value of Indian rupee has gone down by 12.7 percent since the start of May.

The Indian rupee fell to a record low on Tuesday, prompting the central bank to intervene and raising prospects for fresh measures to bolster a currency down 12.7 percent since the start of May as the country struggles to bring down its current account deficit. Unless Prime Minister Manmohan Singh's weak coalition government announces substantial reforms, or resorts to raising debt abroad to attract rapid capital inflows, the rupee is likely to fall further, traders said.

The partially convertible rupee fell to as much as 61.80 to the dollar, smashing through a previous low of 61.21 hit on July 8, on what traders said was dollar demand from importers. Dealers said dollar sales by the central bank helped the rupee recover to 61.60 by afternoon trade. "Investors' negative sentiment has thrown rupee into the deep valley," said Pramit Brahmbhat, CEO of Alpari Financial Services, an FX consultancy. "It is expected to trade near 62.00 levels in coming days as India's record high current account deficit and weak fundamentals will further weaken the rupee."

Possible quick fixes, including raising money from Indians abroad or pushing state-run banks and companies to sell dollar debt, remain potentially expensive in a global environment no longer favouring emerging markets. In the near-term, a reluctant central bank may have to hold the fort in the rupee's defence, most likely by intensifying its strategy of squeezing rupee liquidity in the money market after measures taken so far have failed to stem the tide. "I expect direct interventions and further measures which will only work to slow the trend, because reversal requires fundamental reforms that are unlikely to happen," Dariusz Kowalczyk, senior economist and strategist Credit Agricole In Hong Kong, told Reuters.

With a national election due by next May, chances have become more dificult for the government to pass substantial reforms needed to rein in a current account deficit that hit a record 4.8 percent of gross domestic product last fiscal year. In the current session of parliament, which opened on Monday, the government hopes to pass some 43 bills and ordinances, including one measure to allow up to 49 percent foreign investment in the pension sector and another aimed at simplifying the process of buying land for business purposes. At least, India's markets were unmoved by a flare up of violence in Kashmir, where five Indian soldiers were killed in an attack along the disputed border with Pakistan.

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