Indian Rupee Hits Fresh Lows Amid US Fed Stimulus Cut Fears

A slide in the Indian rupee continued despite India's measures to contain the currency's decline in value, as traders were increasingly worried about the scaling back of a massive stimulus programme in the US.

The rupee fell to 65.55 against the US dollar in the morning on 22 August, even after the Reserve Bank of India's (RBI) liquidity tightening measures. The dollar was trading at 65.29 rupees, up 1.96%.

Having lost almost a fifth of its value during 2013, the Indian currency has been the worst performing among its major Asian peers. It has fallen by about 16% against the US dollar since May.

The rupee's depreciation comes amid a rapid slowdown in the country's economic growth and rising budget deficit. India's foreign exchange reserves have come down to a level that it can pay for only seven months of imports. Economic growth slowed to 5% last year, the weakest rate of expansion in a decade.

The RBI has recently undertaken measures to tighten the money supply and stop the slide in the rupee by raising short-term interest rates. As a result of the measures, money market rates have come in line with the benchmark marginal standing facility (MSF) rate of 10.25%.

An increase in money market rates normally lead to higher borrowing rates for banks, which would translate to lesser availability of the rupee.

India's money-tightening measures have also affected long-term interest rates, as the yields of the 10-year government bond rose to 9.48% on 20 August, the highest rate since 2001.

As a temporary measure to boost long-term credit availability for key sectors of the economy, the central bank announced more than a billion dollars' worth of stimulus.

The RBI said it will spend 80bn rupees ($1.3bn, €972m, £830m) to buy back long-term government bonds through the open market to bring down borrowing costs.

Tapering of US Stimulus

Several economists attributed the rupee's slide to the US Federal Reserve's planned scaling back of its massive stimulus programme.

Amid concern that the US will cut down its $85bn monthly stimulus, international investors are increasingly looking to sell their emerging-market assets. According to the Securities and Exchange Board of India, international investors have disposed a net $3bn worth of Indian stocks since 3 June.

The closely-watched US Fed minutes of the July meeting showed that officials were "broadly comfortable" with the tapering plan. However, it provided few clues about the central bank's timing for scaling down its massive bond buy-back programme.

The minutes added to the uncertainty of global investors and most emerging Asian economies suffered a hit to their shares and currencies as a result. The US had used the stimulus programme to increase liquidity in the market in the wake of the global economic crisis. Part of the stimulus has flowed into Asia, boosting asset prices in the region.

Meanwhile, analysts were confident that the Fed will go ahead with its timeline for the tapering.

"Most analysts still expect tapering to start in September, or at the bare minimum a September announcement and implementation through October and November,'" Stan Shamu, a market strategist at IG Markets in Melbourne, told BBC News.