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Last updated: August 21, 2013 10:47 am
The Indian rupee fell to a new low against the dollar on Wednesday and stocks declined after a central bank promise to inject liquidity into the country’s financial markets provided only temporary relief from a deepening sense of crisis.
Bank shares and bond prices had jumped in the morning after the Reserve Bank of India’s latest intervention, but the euphoria quickly evaporated.
At one point the rupee was down over 2 per cent and hit a record low of Rs64.55 to the dollar amid investor scepticism about the policies of the RBI and the Indian government. The Sensex stock index fell nearly 2 per cent to close at 17,905.91, the lowest in nearly a year.
On Tuesday night the RBI announced that it would purchase Rs80bn ($1.2bn) of long-dated government bonds and take other steps to ease pressures on Indian banks, whose valuations have been badly hit by a series of measures introduced to protect the rupee over the past month.
The latest moves partially reversed previous monetary tightening measures and led to accusations from analysts of Indian policy “flip-flops” just as the governorship of the RBI is passing from Duvvuri Subbarao to Raghuram Rajan, the former International Monetary Fund chief economist who takes over on September 5.
Indian officials and central bankers say their economy is only one of several emerging markets that are suffering from the flight of investors back towards the US, where the prospect of an end to the Federal Reserve’s ultra-easy monetary policies has made dollar assets more attractive.
“It is important to address the risks to macroeconomic stability,” the RBI said in an explanation of its latest move. “At the same time, it is also important to ensure that the liquidity tightening does not harden longer term yields sharply and adversely impact the flow of credit to the productive sectors of the economy.”
Credibility and predictability are precious commodities in the world of central banking – not least when a financial crisis is raging. Right now, the RBI conspicuously lacks both
- Nicholas Spiro, Spiro Sovereign Strategy
The government and the RBI have issued a series of edicts in recent days designed to reduce the current account deficit and bolster the rupee, including increases in the import duty on gold, the end of duty exemptions for flatscreen televisions brought in by airline passengers and restrictions on outward direct investment by Indian companies and individuals.
Far from reassuring investors, however, the hotch-potch of measures has created the impression that the Indian authorities are flailing around for stopgap solutions rather than devising any long-term strategies for economic recovery.
“India’s central bank is adding to its woes by appearing to change its policy goals almost from one day to the next,” said Nicholas Spiro of London-based Spiro Sovereign Strategy, arguing that the RBI was now sending a “dangerous signal” that it did not have the stomach to defend the rupee if the flight from emerging markets worsened.
While the RBI’s aims of promoting growth and preventing rupee depreciation were inherently contradictory, he said, “credibility and predictability are precious commodities in the world of central banking – not least when a financial crisis is raging. Right now, the RBI conspicuously lacks both.”
Rajeev Malik, senior Asia-Pacific economist at brokerage CLSA, wrote in a note that “flip-flops” by Indian policy makers were continuing.
“The latest moves by the RBI are aimed at cleaning up the unintended mess in the bond market from their convoluted and ineffective currency defence,” he said. “But they still appear unsure of what [growth, rupee, bonds] they want to eventually save.”
Other analysts said the measures were likely to be at least partially successful in correcting the unintended consequences of previous tightening measures.
“They have been trying to walk a careful balance, with measures aiming to stabilise the currency, but they never really intended it to spill over to long-term yields, which have been shooting up,” says Leif Eskesen, chief economist for India at HSBC.
“And so they are now trying to ensure that they don’t do anything to hurt growth and curb credit growth ... and this should to some extent help to contain yields, although there is still a difficult backdrop.”
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