NEW DELHI – Indian policymakers are looking increasingly panicky as they battle the worst currency crisis in more than two decades, and more worryingly there is no sign their remedies are working.
The rupee lurched to a new lifetime low of 62.03 to the dollar on Friday while the benchmark share index posted its biggest one-day fall since September 2011.
“None of the policymakers’ Band-Aid measures (from capital controls to tightening liquidity) seems to be working. They have not been able to turn the tide,” Rajeev Malik, economist at investment house CLSA, said.
“The government and the Reserve Bank of India are taking firefighting measures.”
The rupee has lost 57 percent of its value against the U.S. currency since it peaked at 39.40 rupees to the dollar in February 2008.
The currency’s strength began unraveling when Lehman Brothers collapsed later that year, triggering the global financial crisis.
But pressure on the rupee has mounted in the past two years as investor alarm over a slowing economy and a ballooning current account deficit — the widest measure of trade — has grown.
Part of the reason for the currency’s most recent slide — it has fallen 13 percent this year against the greenback — lies outside Indian policymakers’ remit.
But other reasons for the rupee’s drop are home-made — failure to move fast enough on economic reform, a series of government corruption scandals, perceptions of policy paralysis and the record current account deficit, analysts say.
Since June 1, overseas funds have pulled out almost $11.6 billion from India’s stock and debt markets.
Investors worry that despite the long-term growth potential of the country of 1.2 billion people, “things are not in shape in the interim period,” said investment house IDBI research head Sonam Udasi.
As the rupee’s woes have deepened, authorities have responded with a clutch of measures to try to stem its decline and avert a balance-of-payments crisis.
India has painful memories of its 1991 balance of payments crisis when it failed to attract enough foreign currency and was forced to fly 47 tons of gold as collateral for an International Monetary Fund loan in what was seen as a national humiliation.
Prime Minister Manmohan Singh, who was finance minister at the time, was moved Saturday to rule out a repeat, saying: “There is no question of going back to the 1991 crisis.”
With an election to be held by May 2014 and pro-market reforms divisive, there is no way the government can undertake root-and-branch reforms needed to put the economy back on track, economists say.
“There is a complete lack of faith in the markets” about India’s outlook, said Param Sarma, chief executive at consultancy firm NSP Forex. “We are slowly, but surely, likely to enter a phase of a crisis,” he said.