Indian rupee sinks to fresh record low

The Indian rupee fell below Rs65 to the US dollar in intraday trading on Thursday, as minutes from the US Federal Reserve's July meeting confirmed expectations that it could begin tapering its quantitative easing programme by the end of the year.
Since May, when talk of the Fed reeling in its asset purchase programme began, money has been drawn out of emerging markets. India, with its unsustainable current account deficit, has been affected in particular.
"Everything is to do with the Fed decision," said Sonal Varma, an economist at Nomura, explaining the sharp depreciation of the rupee. "Not just the announcement last night [Wednesday] but the move since May has been driven by tapering expectations."
The Fed minutes, published on Wednesday, did not provide any details on when the tapering might begin, though most officials were "broadly comfortable" with plans to begin reeling in the stimulus package.
The rupee extended a run of record lows, hitting Rs65.6 to the dollar in morning trading. Meanwhile, equity markets gained with the benchmark Sensex index up 2.3 per cent at 18,312.94 by mid-afternoon.
"Even if you talk about the past month or so, most of the outflows on the FII [foreign institutional investment] front took place on the debt segment," said Anubhuti Sahay, an economist at Standard Chartered, explaining there is little direct linkage between FII flows from equity markets and the depreciation of the rupee.
Investor sentiment in India has been hit by recent policy actions, which have sent mixed signals to the market. The Reserve Bank of India has announced a series of new measures aimed at stemming the rupee's decline, but restrictive capital controls announced last week have been taken as a signal of desperation.
After raising short-term rates in July in an attempt to restrict speculative trading, the central bank announced a new set of measures on Tuesday aimed at easing pressure on long-term yields to ensure the availability of credit in relevant sectors.
"The RBI has done everything to support the rupee," Moses Harding, of Lakshmi Vilas Bank, told local television. "But given the weak domestic fundamentals the effect was nothing."
Minutes from an RBI advisory committee meeting on Wednesday added to the negative outlook in Asia's third-largest economy, highlighting slowing domestic activity and weak industrial production.
The minutes of the meeting pointed to the large current account deficit and pressure on the rupee as the "immediate concern that needs to be addressed". The minutes also indicated that some members of the committee felt the depreciation of the rupee should be allowed, to help Indian exports gain competitiveness.
The RBI said the international investment position - the gap between external assets and liabilities - had risen by half in the past two years and that the current account deficit was "high and unsustainable".
The central bank will be in a tight spot next month when it meets to make a decision on monetary policy. While tightening policy would strangle growth in India's floundering economy, loosening policy risks stoking inflation.
Analysts at Lombard Street Research suggest that, with recent policy actions proving inadequate and the necessary structural reforms unlikely given the forthcoming elections, policy makers may be "forced into an abrupt and aggressive monetary tightening cycle".

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