Economists are concerned that the US Federal Reserve will begin winding down its bond buying scheme, which has helped fuel an investment splurge in Asia’s emerging markets.
Since June 1 after the US Fed signalled a tapering of its stimulus overseas funds have pulled out nearly $12 billion from India’s stock and debt markets.
The Reserve Bank of India (RBI) and the government have been trying to stabilise the rupee for months by announcing measures such as hiking short term interest rates and imposing capital controls.
But the measures have failed to halt the plummet and this week the central bank changed tack, announcing it would inject 80 billion rupees ($1.26 billion) into the banking system by buying back long term government bonds.
The move is aimed at making more credit available to boost economic growth.
If the crisis worsens the country may be forced to go to the International Monetary Fund to borrow funds in a repeat of its 1991 balance of payments problems, which were considered a national humiliation.
But the RBI’s annual report for 2012-13, released Thursday, said India’s foreign exchange reserve, “although lower than in the pre-crisis period, is adequate to finance about seven months of imports”.
RBI governor Duvvuri Subbarao later said this was enough to manage the current situation.
Dealers have said they fear the rupee could weaken further with Deutsche Bank analysts forecasting on Wednesday that the it could fall to 70 to the dollar.
Minutes from the US Fed’s July policy meeting released Wednesday showed board members had differing opinions on when the US economy would be strong enough to wind down the $85 billion a month bond-buying.
