Mixed signals from the RBI and the government over how to handle the fall in the rupee has contributed to its decline, investors say.
MUMBAI: Mixed signals from the Reserve Bank of India and the government over how to handle the fall in the rupee has contributed to its decline, investors say.
The central bank has appeared at times to contradict the thrust of its policy to try to stabilise the currency and also seemed at odds with the finance ministry, undermining market confidence in their resolve to tackle the problem, they say.
"The contradictions between the actions and voices from the central bank and finance ministry have aggravated the volatility in the market," said Ganti N Murthy, head of fixed income at Peerless Fund Management Co Ltd in Mumbai.
The partially convertible rupee hit a record low of 61.21 per dollar on July 8 and has hovered close to that level since. On Monday it traded around 60.8, down 9.6 per cent this year, the weakest emerging market currency in Asia against the dollar among those monitored daily by Reuters.
A record current account deficit and a slump in economic growth in recent years to the lowest pace in a decade have undermined confidence in the currency. A government struggling to push through bold economic reforms ahead of a general election needed by May next year has added to investor jitters.
Traders say authorities have tripped up a number of times, and that has contributed to the rupee's weakness.
The central bank announced a bold strategy to tighten cash conditions in the middle of July, including a rise in short-term borrowing costs and restricting funds available for banks.
But within days it rejected all bids in a treasury bill auction and most bids in a special bond sale organised specifically to mop up cash. That seemed to run against its own efforts to tighten cash conditions and raised doubts about what the central bank wanted to achieve, dealers said.
At the time, sources familiar with the central bank's thinking said the bids were rejected because they were too high. But as the rupee then continued to fall, the central bank changed tack.
The next week, it accepted all bids in a treasury bill auction at the highest yields in at least six years, helping lift the rupee to its strongest level in five weeks.
However, a few days later Indian markets were left with doubts again at the RBI's policy review when Governor Duvvuri Subbarao said the central bank was ready to pare back its cash-draining steps once foreign exchange rates stabilised. The rupee skidded 1.8 per cent, a large move for a currency.
"The market had begun to think that the RBI was serious about its rupee defence and the comments undermined that," said Credit Suisse economist Robert Prior-Wandesforde in Singapore.
The central bank has appeared at times to contradict the thrust of its policy to try to stabilise the currency and also seemed at odds with the finance ministry, undermining market confidence in their resolve to tackle the problem, they say.
"The contradictions between the actions and voices from the central bank and finance ministry have aggravated the volatility in the market," said Ganti N Murthy, head of fixed income at Peerless Fund Management Co Ltd in Mumbai.
The partially convertible rupee hit a record low of 61.21 per dollar on July 8 and has hovered close to that level since. On Monday it traded around 60.8, down 9.6 per cent this year, the weakest emerging market currency in Asia against the dollar among those monitored daily by Reuters.
A record current account deficit and a slump in economic growth in recent years to the lowest pace in a decade have undermined confidence in the currency. A government struggling to push through bold economic reforms ahead of a general election needed by May next year has added to investor jitters.
Traders say authorities have tripped up a number of times, and that has contributed to the rupee's weakness.
The central bank announced a bold strategy to tighten cash conditions in the middle of July, including a rise in short-term borrowing costs and restricting funds available for banks.
But within days it rejected all bids in a treasury bill auction and most bids in a special bond sale organised specifically to mop up cash. That seemed to run against its own efforts to tighten cash conditions and raised doubts about what the central bank wanted to achieve, dealers said.
At the time, sources familiar with the central bank's thinking said the bids were rejected because they were too high. But as the rupee then continued to fall, the central bank changed tack.
The next week, it accepted all bids in a treasury bill auction at the highest yields in at least six years, helping lift the rupee to its strongest level in five weeks.
However, a few days later Indian markets were left with doubts again at the RBI's policy review when Governor Duvvuri Subbarao said the central bank was ready to pare back its cash-draining steps once foreign exchange rates stabilised. The rupee skidded 1.8 per cent, a large move for a currency.
"The market had begun to think that the RBI was serious about its rupee defence and the comments undermined that," said Credit Suisse economist Robert Prior-Wandesforde in Singapore.
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