India’s rupee slumped to a fresh all-time low amid deepening concerns over the government’s economic management and building emerging market turmoil globally.
The 2.4 per cent fall to a record 63.2 to the U.S. dollar marked the rupee’s worst day in nearly two years and took the currency’s slump against the greenback this year to 12 per cent. Only the Brazilian real and the South African rand have recorded bigger declines globally in 2013. India’s benchmark Sensex share index also fell by nearly 2 per cent while 10-year bond yields pushed above 9 per cent, their highest level since the 2008 financial crisis.
Monday’s moves in India came alongside grim news from emerging economies and more evidence of how the U.S. Federal Reserve’s plan to end its monetary stimulus has continued to thump stocks, bonds and currencies across the developing world.
All but one of the 24 biggest emerging market currencies tumbled against the U.S. dollar on Monday, with the Brazilian real falling to its lowest level since February, 2009. Over the past six months only China’s heavily managed renminbi has managed to hold its ground against a resurgent dollar.
Fears over the impact of the Fed’s plans to scale down its bond purchases have been compounded by slowing economic growth and deteriorating fiscal fundamentals in many countries. Investors are particularly concerned by states with current account deficits that have been plugged by inflows of more flighty investor capital, rather than stickier foreign direct investment.
“It’s the current account deficit countries that are in the most trouble,” said Angus Halkett, a bond fund manager at Stone Harbor Investment Partners. “The market is becoming a lot choosier where it puts its money, and some countries are going to find it tough.”
Indonesia provided evidence of that on Monday as its main equities index fell by some 5.6 per cent after the country’s central bank reported on Friday that its current account deficit had widened sharply in the second quarter of this year.
New numbers on Monday also showed how the growth equation is changing for emerging economies with Thailand’s economy slipping into a technical recession thanks to weak exports and sluggish domestic demand.
But India remains the biggest concern for many investors with the pessimism there driven by questions about the government’s economic management following its introduction of a number of failed measures to support the currency, some of which appear to have exacerbated the country’s problems.
The burgeoning crisis in India has also become increasingly political with senior figures from the opposition Hindu nationalist Bharatiya Janata party declaring on Monday that the only way out was for the government to call early elections, now due to be held by May 2014.
“The government seems to have lost control over the economy. Nothing they are doing is helping,” said Yashwant Sinha, a former BJP finance minister and party leader. “There is a trust deficit, a crisis of confidence that can only be sorted out through the political process.” Calling for new elections would “stabilize the markets”, he said.
The call for an early poll was echoed by some close to the Congress party. Sanjaya Baru, a former adviser to Prime Minister Manmohan Singh, said early elections would remove the sense of drift hanging over the economy.
“People are just watching and waiting. What India needs is to revive investment, but I don’t see that investment revival until a new government is in place,” he said.
Mr. Singh, an economist, over the weekend sought to soothe nerves by insisting that India was far from a replaying of the 1991 balance of payments crisis. His supporters argue that, with foreign reserves now able to cover six months of imports versus just two months on the cusp of the 1991 crisis, India is in a much better place than it was then to handle market turmoil.
But analysts said the government response remained insufficient.
Jahangir Aziz, chief Asia economist for JPMorgan, said the government needed to do much more to win over the markets. “They are giving a sense that they don’t have any options left when in reality they do have options and they need to put them on the table,” he said.
The government last week issued capital controls on overseas investments by Indian companies and individuals to staunch currency outflows. But it needed to attract capital, Mr. Aziz said, through measures including liberalizing restrictive rules that prevent long-term foreign investors from buying Indian government and corporate bonds.
“They have only taken steps to stop money from going out. They have to worry about bringing money in,” he said.