India fails to arrest rupee’s slide

India puts forward an underwhelming response to save the embattled rupee.

Markets were generally unimpressed by the Indian government’s steps yesterday to prop up the rupee. Among these measures was a US$5 billion increase in the foreign investment cap in government bonds that fell far short of calls for bolder action to prop up the rupee that hit a record low of 57.32 per US dollar last June 22.

The Reserve Bank of India, the central bank, stepped into markets late that day to support the currency. The rupee has depreciated 12% since March.

The central bank also raised the bond limit to US$20 billion and announced other small steps. The steps were the latest in an effort to combat a loss of confidence in India’s economy, which fell in the first quarter of this year to its worst growth in nine years.

The rupee hit a series of record lows this year in a continuous tumble that began in the middle of 2011. It has fallen about 7% so far this year, making it the worst performing currency monitored daily in Asia by Reuters.

"Until they address longer-term structural issues around capital flows and competition in the domestic retail sector which can help bring down inflation pressures, I think markets will be left disappointed," said Jonathan Cavenagh, senior forex strategist at Westpac in Singapore.

Economists have long said India needs to improve its economic fundamentals to bolster the rupee. In immediate need of attention is the country’s current account and fiscal deficits.

Critics say the government needs to reduce fuel and fertilizer subsidies that are ballooning the fiscal deficit and add more pressure on the current account and the rupee.

“I don't believe these measures will do much to improve the currency situation, because the problem plaguing the currency are the twin deficits, and that can only be addressed by cutting the fiscal deficit. And that is a much tougher job," said A. Prasanna, economist at ICICI Securities Primary Dealership.

The runaway fiscal deficit, which is close to 6% of the GDP, and the massive US$180 billion trade deficit are areas of serious concern that also weigh on the rupee.