India flags need to retain stability as Fed risk hurts rupee

Indian rupees (Source: Bloomberg) Indian rupees (Source: Bloomberg)

The Reserve Bank of India said the nation’s economic and monetary policies must preserve financial stability as the prospect of reduced U.S. Federal Reserve stimulus contributes to a slide in the rupee.

Currency weakness could stoke already “high” consumer- price inflation, the Reserve Bank said in its annual report released in Mumbai today. Other challenges include a current- account deficit that exceeds sustainable levels, slowing growth, budget-deficit risks and rising bad loans at banks, it said.

The rupee touched an unprecedented low today as concern the Fed will taper stimulus prompts investors to pull billions of dollars from emerging markets. The RBI plans to buy long-dated government debt tomorrow after engineering a cash squeeze last month to support the currency, a step that imperiled economic expansion by spurring a surge in bond yields.

“The RBI has no choice but to maintain financial stability at this point, which means sacrificing growth in the near term,” said Tirthankar Patnaik, a strategist at Religare Capital Markets Ltd. in Mumbai.

The rupee touched an all-time low 65.56 per dollar today and has tumbled 15% in 2013. The yield on the 7.16% government bond maturing May 2023 fell to 8.24% from 8.41% yesterday ahead of the RBI bond purchases. The S&P BSE Sensex index rebounded 2.3%.

Rupee ‘Overshot’

Finance Minister Palaniappan Chidambaram and Reserve Bank Governor Duvvuri Subbarao held co-ordinated briefings in New Delhi today to try to soothe investors’ nerves.

Excessive pessimism is unwarranted, economic expansion will pick up as the year progresses and the rupee’s drop has overshot appropriate levels, Chidambaram said.

India has no intention of imposing capital controls, he and Subbarao said. The Reserve Bank last week cut the amount Indian companies can invest abroad without approval and said residents can remit $75,000 per financial year, down from $200,000.

“Macroeconomic and monetary policies need to be carefully calibrated to achieve the immediate objective of maintaining stability without compromising growth,” the central bank said.

The monetary authority reiterated that the steps since mid- July to tighten liquidity “are intended to be rolled back in a calibrated manner” as the rupee stabilizes, so that policy can revert to supporting growth and containing inflation.

The Reserve Bank since July 15 has raised the marginal standing facility and bank rates, capped cash injections into the banking system and tightened lenders’ daily reserve requirements to curb the supply of rupees. On Aug. 20, it announced plans to buy long-dated government debt.

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