Falling Indian factory activity adds to rupee's woes

Mon Sep 2, 2013 4:40am EDT
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By Subhadip Sircar

MUMBAI (Reuters) - The Indian rupee remained frail after last week's record low, as pessimism generated by dismal economic growth data was compounded on Monday by survey showing factory activity in August shrank for the first time in over four years.

Investors want bold reforms to restore confidence in India, spur growth, reduce a record current account gap, while keeping a worryingly high fiscal deficit under control.

Measures taken by Prime Minister Manmohan Singh's minority government since the rupee began its slide in May have left the market unimpressed, and there are fears that the ruling coalition will put politics before the urgent needs of the economy with an election due by May next year.

Quoted at 66.09 per dollar by midday, the rupee was just a touch weaker than Friday's close of 65.70/71, and still within easy striking distance of the all time low of 68.85 to the dollar struck on August 28.

Aggressive intervention by the Reserve Bank of India had helped lift the rupee off its low late last week. The RBI's main defense, squeezing rupee liquidity and pushing up short term interest rates, has pushed up borrowing costs for already depressed corporates, but has barely stemmed the rupee's fall.

The rupee has depreciated around 16 percent since May, and has fared worse than other emerging market currencies that have been hit since the U.S. Federal Reserve first hinted that it was considering tapering off its bond buying stimulus.

Raghuram Rajan, a vaunted former chief economist at the International Monetary Fund, will step into his new role as RBI governor on Thursday, having been the prime minister's economic advisor for the past year.

But there was little to cheer, as the gross domestic product data released on Friday showed the economy had grown at a weaker than expected 4.4 percent in the April-June quarter from a year earlier, the slowest quarterly rate since the global financial crisis four years ago.   Continued...

An employee poses with the bundles of Indian rupee notes inside a bank in Agartala, the capital of India's northeastern state of Tripura August 22, 2013. REUTERS/Jayanta Dey