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Friday, September 6, 2013

India unveils measures to support ailing rupee


Published: Friday September 6, 2013 MYT 12:00:00 AM 

MUMBAI: The rupee rallied and shares surged after India’s new central bank chief unveiled measures to support the ailing currency, providing a shot of confidence for investors unnerved by the country’s worst economic crisis in two decades.
However, amid the euphoria over Reserve Bank of India governor Raghuram Rajan’s energetic Wednesday debut, investors warned he cannot by himself repair an economy mired by slowing growth and a record high current account deficit that has helped fuel a drop in the rupee of as much as 20% this year.
Rajan faces pressure from investors to roll back the central bank’s controversial steps to defend the rupee by draining cash from the market and raising short-term interest rates at a time when investors are clamouring for ways to boost growth.
The government has struggled to push through politically tough reforms needed to fix the economy, and elections due by next May raise the prospect of expensive populist spending that could threaten the country’s sovereign credit rating, which is one notch above junk status.
“This is certainly not the bottom. Rajan means business, but most of his measures are just statements of intent, especially in the light of government finances being so precarious,” said G. Chokkalingam, managing director and chief investment officer at Centrum Wealth Management. “The continued deceleration of the industrial economy, the fiscal conditions and the Fed tapering worries will continue to weigh.”
Yesterday, however, scepticism was trumped by euphoria over Rajan, a prominent former chief economist at the International Monetary Fund, who unexpectedly unveiled a flurry of proposals in his first day at the helm of the central bank.
The rupee rose as much as 2.3% to 65.53 per dollar, well off the record low 68.85 hit on Aug 28, when it was down more than 23% from its 2013 peak. The main NSE share index rose as much as 3.3%, propelled by lenders such asHDFC Bank, which surged after new steps outlined by Rajan that included increasing overseas borrowing limits for banks. But the index was still down more than 10% from its May highs.
The new measures to prop up the rupee included providing exporters and importers more flexibility in hedging their forward currency contracts, as trading firms had long complained about regulation that left them unable to quickly cope with rapid currency movements.
Rajan faces difficult decisions ahead, including navigating uncertain global conditions marked by rising military tension over Syria, which is pushing up India’s oil import bill, and the prospect of an end to US monetary stimulus.
The RBI has been the main line of defence against the rupee so far, with previous governor Duvvuri Subbarao having opted to sacrifice near-term economic growth, putting interest rate cuts on hold in a quest for financial stability. With economic growth remaining weak, investors are already clamouring for the RBI to change course.
“I will not give in to the personality and sentiment. I will look at data,” said Phani Sekhar, a fund manager at Angel Broking in Mumbai. “The governor has no control on fiscal policy so what do you expect the RBI to do? If Rajan continues focusing on inflation, his newly found fan club will vanish sooner than later.” — Reuters

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