India's war on gold fails to protect the rupee, which keeps plunging


But maybe it's still protecting the U.S. dollar.

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India's Efforts Fail to Prevent New Rupee Low

By James Crabtree and Josh Nobel
Financial Times, London
Monday, August 19, 2013

India and Indonesia appeared trapped in a race to the bottom on Monday, as both the rupee and the rupiah fell sharply against the US dollar, prompting a selloff in equities.

The Indian rupee continued its relentless decline, hitting the latest in a series of all-time lows against the US dollar and dashing hopes the government had succeeded in calming the country's unsettled financial markets.

The currency touched a new low of Rs62.70 around lunchtime, dropping below its previous lowest level set during a dramatic day of stock market falls on Friday, down by roughly 1.7 per cent from its previous close. On Monday the benchmark Sensex index of shares dropped a further 2.3 per cent.

... Dispatch continues below ...


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The Indonesian rupiah fell some 2 per cent, sparking a 5.6 per cent drop in the country's main equity market. Data released on Friday by the country's central bank showed that Indonesia's current account deficit widened sharply in the second quarter to 4.4 per cent of gross domestic product.

Like India, Indonesia relies on foreign capital to fund its deficits. But global investors have been pulling back from emerging markets since May, amid expectations the US could soon start reversing its ultra-loose monetary policy.

The Indian rupee has now overtaken the Australian dollar and the Japanese yen to become Asia’s worst performing currency this year, having fallen 12 per cent against the US dollar. Globally, only the Brazilian real and the South African rand have recorded bigger declines.

The fresh currency falls also increased pressure on the debt markets. Yields on India's 10-year debt spiked above 9 per cent for the first time since late 2011, while Jakarta's cost of borrowing jumped 18 basis points to the highest level since March 2011.

A series of interventions by the Reserve Bank of India in recent weeks aimed at protecting the rupee have seen India's bond yields surge, from just above 7 per cent in May, but have not succeeded in stemming the rupee’s fall.

Over the weekend a range of senior figures including Prime Minister Manmohan Singh tried to calm investor fears that the country's mixture of weakening growth and an unsustainable current account gap was pushing India’s economy towards a crisis point.

Notably, officials ruled out capital controls on foreign investors, following a series of limited regulations restricting movement of funds for domestic institutions that alarmed markets last week, amid concerns that larger foreign "long only" funds might soon begin to remove money from India.

"I've really never seen confidence in India this low, especially amongst the domestic companies," said one international investor at a global institution, who spoke on condition of anonymity.

"But the problem is there isn't anything they [the authorities] can really do now, given that where this goes is all very dependent on what happens globally . ...  The authorities can avoid exacerbating the situation, which they failed to do last week, but it is now too late to stop this. The gap in the current account deficit is there, and the confidence is lost."

India now faces a series of delicate policy choices, given that any steps to fix the underlying problems of the current account deficit could backfire and would in any case take many months to have an effect, while market confidence is ebbing much more quickly, analysts said.

"This turbulence will continue in the short run, but Friday's mayhem was really triggered by the fear that the RBI would do more in the way of capital controls," said Shubhada Rao, chief economist at Yes Bank in Mumbai. "I think that was overdone  ...  but the problem is that while India is trying to mend its current account problem this will take time, while the markets are reacting to overnight news."

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