Analysis : Fed delivers reprieve for India, risks sowing complacency

Thu Sep 19, 2013 7:48am EDT
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By Tony Munroe

MUMBAI (Reuters) - The U.S. Federal Reserve's decision to press ahead with its asset-buying gives India's battered rupee a reprieve and creates space at a policy review on Friday for its central bank to scale back some of the measures put in place to support the currency.

But the same release of pressure on the currency could also send a signal that the worst of India's crisis is over, which risks fuelling complacency among policymakers - already gearing up for national elections by May - about the need for tough reforms to make the economy more investor friendly.

At the Finance Ministry in New Delhi, some officials who had stayed up late to watch the Fed decision on TV expressed relief.

Worries earlier this year that the Fed would reduce its stimulus had triggered an exodus from emerging markets and exposed an Indian economy saddled with hefty current account and fiscal deficits and a government with little political will to push through difficult economic reforms. As investors rushed for the exit, the rupee tumbled to a record low in August for a loss of around 20 percent this year.

The currency has since risen 11.4 percent, helped by a raft of emergency measures put in place by Indian authorities, including the Reserve Bank of India (RBI), the central bank.

It rallied 2.6 percent on Thursday after the Fed's unexpected move to maintain its cash injections into the world's biggest economy at $85 billion a month.

"There is certainly the danger of a more relaxed stance from the policymakers till the next round of tapering concerns hit the markets. They should just see this as a 2-3 months reprieve," said Robert Prior-Wandesforde, economist at Credit Suisse in Singapore.

"The RBI should not use this to ease monetary conditions. The rupee has only retraced a month's losses and is certainly not strong or stable. My sense is RBI will not touch the key rates but the tone will be somewhat more dovish," Prior-Wandesforde said.   Continued...

A vendor arranges a price tag over a sack filled with sugar at a wholesale vegetable market in the western Indian city of Ahmedabad September 11, 2013. . REUTERS/Amit Dave