Rupee at record low as India seen lacking options to brake fall

Traders say RBI's firepower was likely to be limited given it has foreign exchange reserves of $290 billion

A top official said the government has options to stem a fall in the rupee but did not offer any specifics, turning the focus on the RBI to stem a rout that sent the rupee to record lows and bond yields surging on Thursday.

The rupee, the worst Asian performer on Thursday in a global market sell-off, was instead supported by the Reserve Bank of India, which stepped in to sell dollars after it slumped to a record low of 59.9350 against the dollar, traders said.

Yet, traders said the RBI's firepower was likely to be limited given it has foreign exchange reserves of $290 billion, only enough to cover imports for seven months.

The mixed government messages and a cautious RBI are exacerbating the perceived vulnerability of a country suffering from a record-high current account deficit in the midst of a global downturn sparked by potential tapering in US monetary stimulus and a weakening Chinese economy.

"Both the willingness and ability appear to be limited for the government," said Samiran Chakrabarty, head of research at Standard Chartered Bank in Mumbai.

"The RBI is also favouring relative free movement of the currency," he added.

The rupee has been among the top decliners in emerging currencies since May due to a current account deficit that hit a record 6.7% of gross domestic product in the October-December quarter. It was last trading at 59.82/81 from its 58.71/72 close on Wednesday.

The falling rupee and a narrowing differential with US Treasury yields have hit bonds hard, spurring foreign investors to sell a net $4.7 billion over the 19 sessions through Tuesday.

Government bonds slumped again on Thursday. The benchmark 7.16 pct 2023 bond yield rose 10 basis points to 7.36% from its previous close, which led to the fixed income association scrapping trading bands.

Government officials have blamed global volatility for the rupee's tumble and vowed action without offering specifics.

"We should not let ourselves be led by the markets into directions we don't want to go," India's chief economic adviser, Raghuram Rajan, told reporters on Thursday, though he also said the government was ready to act.

"Let me emphasise, we are not short of actions and instruments if and when the need arises."

The comments were stronger than those of a senior ministry official who spoke with reporters earlier in the day without wanting to be identified. "You can't do much when there is a global sell-off," said the official. "You have only limited options to deal with this kind of situation."

The RBI kept interest rates on hold this week after cutting them in each of its previous three policy reviews, warning of upward risks to inflation due in part to a weaker rupee.

Indian Finance Minister Palaniappan Chidambaram last week promised government measures including raising foreign direct investment limits and revising locally produced gas prices and power tariffs, though investors remain sceptical about implementation.

"Market does not react to statements now. It looks for actions," said Paresh Nayar, head of fixed income and foreign exchange trading at First Rand Bank.