Indian rupee hurtles lower as foreign investors flee

The Indian rupee slumped to a record low of more than 68 to the dollar on Wednesday on growing worries that foreign investors will continue to sell out of a country facing stiff economic challenges and volatile global markets.

The pummelling in markets – which sent the rupee reeling as much as 3.7 percent to an all-time low of 68.75 – forced the central bank to intervene while state-run Life Insurance Corp was spotted buying shares, allowing domestic indexes to erase steep early losses.

“If steps are not taken to implement the reforms necessary to tackle the structural issues, the government will be left with the so-called ‘3D options’: debt default, devaluation, deflation,” said Angelo Corbetta, head of Asia equity for Pioneer Investments in London.

“In India devaluation is happening now and deflation could be about to start. The good news is that the debt default is highly unlikely.”

Foreign investors sold almost $1 billion of Indian shares in the eight sessions through Tuesday – a worrisome prospect given stocks had been India’s one sturdy source of capital inflows, Reuters reports.

If more foreign investors throw in the towel, traders fear it will put the country at risk of a vicious cycle in which the ensuing hit to confidence in turn slams shares and the currency even harder.

Policymakers have consistently struggled to come up with steps that can convince markets they can stabilise the rupee and attract funds into the country, despite extraordinary measures last month by the central bank to drain liquidity, and action to curb gold imports and cut India’s huge oil import bill.

The partially convertible rupee clawed back some ground later in the day and was at 67.92 as of 10.15 GMT, after posting its biggest daily percentage fall in 18 years on Tuesday.

Still, an assault on the psychologically key 70 level appeared imminent.

RISING OIL PRICES, FED FEARS AMPLIFY PRESSURE

India badly needs foreign capital as it struggles with a record high current account deficit, growing fiscal pressures and an economy growing at the slowest in a decade.

The failure to address India’s economic challenges is becoming an increasing source of tension at a time when fears of a possible U.S.-led military strike against Syria are knocking down Asian markets, with the prospect that the Federal Reserve will soon end its prolonged period of cheap money further raising concerns.

At the same time, rising domestic bond yields threaten to raise borrowing costs across the already slowing economy, while global prices of oil and gold – the country’s two biggest imports – have surged this week.

“The end game for the current decline would be the day the rupee stops falling, alongside government measures like a substantial diesel price hike,” said Samir Arora, a fund manager at Helios Capital in Singapore.

BNP Paribas on Wednesday slashed its economic growth forecast for India for the fiscal year ending in March to 3.7 percent from its previous 5.2 percent – the weakest growth since 1991-92 when India buckled under a balance of payments crisis that required a loan from the International Monetary Fund.

“India’s parliament remains toxically dysfunctional with little, if any, business conducted,” BNP said.

“And, with next year’s general election looming ever nearer, the government’s willingness to instigate a politically unpopular fiscal tightening is close to nil.”

India is due to post April-June gross domestic product data on Friday, with analysts estimating the economy grew at an annual rate of 4.7 percent, roughly in line with the previous quarter. It will also post July federal fiscal deficit figures.