India's authorities are having a tough time clearly defining what they are willing to do in order to stem the rupee's decline.
Reuters: - Mixed signals from the Reserve Bank of India and the government over how to handle the fall in the rupee has contributed to its decline, investors say.The currency is under pressure again, trading near record lows (dollar trading higher against the rupee - chart below).
The RBI has appeared at times to contradict the thrust of its policy to try to stabilise the currency and also seemed at odds with the finance ministry, undermining market confidence in their resolve to tackle the problem, they say.
"The contradictions between the actions and voices from the central bank and finance ministry have aggravated the volatility in the market," said Ganti N. Murthy, head of fixed income at Peerless Fund Management Co Ltd in Mumbai.
Traders say Indian authorities have tripped up a number of times, and that has contributed to the rupee's weakness.
The central bank announced a bold strategy to tighten cash conditions in the middle of July, including a rise in short-term borrowing costs and restricting funds available for banks.
But within days it rejected all bids in a treasury bill auction and most bids in a special bond sale organised specifically to mop up cash. That seemed to run against its own efforts to tighten cash conditions and raised doubts about what the central bank wanted to achieve, dealers said.
|USD/INR (source: Investing.com)|
While the RBI still has a number of options with respect to the rupee (none of which look particularly attractive), the larger issue remains with the nation's economic fundamentals.
Reuters: - A record current account deficit and a slump in economic growth in recent years to the lowest pace in a decade have undermined confidence in the currency. A government struggling to push through bold economic reforms ahead of a general election needed by May next year has added to investor jitters.The trade balance has been deteriorating for quite some time now, ...
... while the "real-time" economic indicators are pointing to not just slow growth, but potentially a contraction. The HSBC composite PMI measure, which combines manufacturing and services, is now in contraction mode for the first time since the Great Recession.
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