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Thursday, 29 August 2013

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CURRENCY & COMMODITIES VIEW


Major Forex News

Rupee nears 70/dollar; posts biggest day fall in 18 years
The rupee slumped to a record low near 69 to the dollar on Wednesday on growing worries that foreign
investors will continue to sell out of a country facing stiff economic challenges and volatile global
markets. The pummeling in markets sent the rupee reeling 3.7 percent to an all-time low of 68.85 with
the unit closing just a touch off that, at 68.80/81 per dollar, its biggest single-day fall since October 1995.
It closed on Tuesday at 66.24/25.In absolute terms too, the 256-basis-point fall in the rupee was the
biggest ever.
An assault on the psychologically key 70 level now appears imminent, as intervention from the central
bank seen mid-morning only gave the rupee a brief respite. In the stock market, state-run Life Insurance
Corp, which was spotted buying shares, allowed the domestic benchmark index to erase steep early
losses and end the day stronger.
If steps are not taken to implement the reforms necessary to tackle the structural issues, the government
will be left with the so-called '3D options': debt default, devaluation, deflation, In India, devaluation is
happening now and deflation could be about to start. The good news is that the debt default is highly
unlikely.
Foreign investors have sold almost $1 billion of Indian shares in the eight sessions through Tuesday - a
worrisome prospect given stocks had been India's one sturdy source of capital inflows in the first half of
2013.If more foreign investors throw in the towel, traders fear it will put the country in a vicious cycle in
which the hit to confidence in turn slams shares and the currency even harder. Policymakers have
consistently struggled to come up with steps that can convince markets they can stabilize the rupee and
attract funds into the country despite extraordinary measures last month by the central bank to drain
liquidity and action to curb gold imports and cut India's huge oil import bill.
India badly needs foreign capital as it struggles with a record high current account deficit, growing fiscal
pressures and an economy growing at the slowest in a decade. The failure to address India's economic
challenges is becoming an increasing source of tension at a time when fears of a possible U.S.-led military
strike against Syria are knocking down Asian markets, with the prospect that the Federal Reserve will
soon end its prolonged period of cheap money further raising concerns.
At the same time, rising domestic bond yields threaten to raise borrowing costs across the already
slowing economy, while global prices of oil and gold - the country's two biggest imports - have surged this
week.
BNP Paribas on Wednesday slashed its economic growth forecast for India for the fiscal year to March
2014 to 3.7 percent from its previous 5.2 percent - the weakest growth since 1991-92 when India buckled
under a balance of payments crisis that required a loan from the International Monetary Fund.

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