Rupee rebounds as new governor takes charge

published 5 September 2013

The rupee rebounded sharply from near record lows on Wednesday as India prepared to invest Raghuram Rajan as the new governor of the Reserve Bank of India. According to Bloomberg, the central bank intervened to prevent the ailing currency falling below its all-time low of 68.8450 per dollar, reached last week, by easing overseas borrowing rules and (it's suspected by currency dealers) heavy US dollar selling. The measures pushed the rupee up 1% to 67.09 per dollar.

India's currency has fallen by 11.5% this quarter the worst performance by 24 emerging-market currencies followed by Bloomberg and is down 20% since the end of 2012. Rajan, a former chief economist at the International Monetary Fund, and one of the first to predict the 2008 financial crisis, starts his new job as the country faces its worst economic crisis for 20 years. Although it's unclear what his approach will be, he faces many challenges besides the rupee.

According to Reuters, figures out this week showed activity in India's services sector shrunk for the second month in a row, its worst showing for four years. Manufacturing and mining activity is also down. Data out last week revealed that annual GDP growth fell to 4.4% from April to June. India has a record current-account deficit and further pressure on the rupee is coming from rising oil and gold prices.

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The government plans a number of reforms to boost economic confidence, such as an increase in subsidised fuel prices, but many foreign investors have little faith that it will push these through. Emerging markets are also being pressured by the prospect of the US Federal Reserve tapering quantitative easing: ahead of this week's G20 summit, India's prime minister Manmohan Singh called for developed countries to help emerging markets by managing an "orderly exit" from QE. One thing is for sure Rajan has his hands full.

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