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Big Ben Bernanke takes a toll on the Indian rupee

Markets melt,Indian rupee hurtles towards 60.

Written by Fe Bureau | New Delhi | Published: June 21, 2013 3:14:48 am

Equity markets across the globe melted on Thursday as investors interpreted US Fed chairman Ben Bernanke’s statement to mean stimulus would be phased out leaving less liquidity globally. Stocks and bonds tumbled as Bernanke hinted after the two-day Federal Open Market Committee meet that the Fed may start reducing bond purchases,sending the US 10-year treasury higher to 2.39%,in morning trades in New York,the highest since October 2011. Gold prices fell to a two-and-a-half-year low of $1,296.8 per troy ounce and with the dollar strengthening,money continued to move out of emerging markets. The cash crunch in China worsened and currencies from the ringgit to the rupee crumbled in what many described was a knee-jerk reaction to the Fed’s statement.

In India,the rupee capitulated to the greenback,opening Thursday’s session at a new all-time low of 59.60 — almost a rupee lower than Wednesday’s close — while a steep jump in the benchmark yield to 7.36% from 7.26% overnight halted bond trading briefly. The Sensex opened 176.5 points lower than Wednesday’s close even as the finance ministry went into a huddle trying to play down the rupee’s fall to near 60 levels. “The rupee is not in a shambles,” chief economic adviser Raghuram Rajan said,adding that the finance ministry was not short of options to tackle the fall in currency and would take action as necessary. Blaming global volatility for the plunging rupee,Rajan said,“We should not let ourselves be led by the markets into directions we don’t want to go.” The government will take measured action rather than react in a knee-jerk fashion,he added. Reassuring the markets,Planning Commission deputy chairman Montek Singh Ahluwalia said the Reserve Bank of India had “a lot of firepower and they will intervene”. While the stock markets failed to recover — despite some spirited buying by domestic institutions — and the Sensex tanked 526.41 points to end the day at 18,719.29,the rupee ended the session at a lifetime low of 59.57.

However,later in the day the auction of $7.5 billion of bonds saw a good response from foreign institutional investors (FIIs) with limits for R39,171crore limits being bought of a total quota on offer of R42,022 crore. Over the past month or so,FIIs have been pulling out money from the debt markets,having sold close to $4 billion worth of paper.

Meanwhile,a seemingly business-as-usual approach saw the Cabinet clear a rejig of centrally-sponsored schemes and the Cabinet Committee on Economic Affairs will meet on Friday to clear critical policy decisions. While there were no announcements on measures to attract foreign capital flows,the increase in foreign direct investment Investment caps for some sectors,recommended by the Mayaram committee,will be decided on by an empowered group of ministers constituted under finance minister P Chidambaram. The ministries concerned have been given a week to respond to changes in the ceiling.

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