Indian rupee falls to new low against US dollar

Indian rupees There are concerns that a weakening rupee may result in a jump in consumer prices in the country

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The Indian rupee has dropped by nearly 4% to a new low of 68.7 to the US dollar amid growing concerns over the health of the country's economy.

The decline comes a day after India approved infrastructure projects worth $28.4bn (£17.7bn) to try to revive the economy and prop up its currency.

The rupee has lost 20% of its value this year and is one of the world's worst-performing currencies.

It has also been hit by fears that the US will scale back stimulus measures.

The US central bank has sought to increase liquidity in the US economy, through its policy of quantitative easing, in an attempt to boost growth.

A part of that liquidity has flowed into Asian markets, such as India, and lifted stock and asset prices.

However, the Federal Reserve has said it will scale back the programme if the US economy improves, with some analysts expecting this "tapering" to begin as soon as next month.

That has seen investors pull money out of emerging markets, hurting currencies and stocks in those countries.

Start Quote

This is unprecedented and we are in uncharted territory for the rupee”

End Quote Vishnu Varathan Mizuho

Stock markets in India, Thailand, Philippines and Indonesia have seen big declines since May this year. The currencies of these countries have also been highly volatile and weakened significantly against the US dollar.

Oil worries

India's currency has also been hurt by a range of other factors, not least the country's burgeoning current account deficit.

A deficit happens when the country's import bill is bigger than its earnings from exports.

A widening deficit not only puts a strain on the nation's foreign exchange reserves and but also indicates that it may need to borrow more money. That has triggered fears that India may not be able to trim its deficit.

A jump in oil prices in the wake of the fears of a military action against Syria has also complicated the situation for countries such as India.

India imports almost 80% of its oil and there are concerns the higher prices will lead to higher inflation and a worsening of India's deficit.

A slowdown in India's growth rate - which has hit its lowest level in a decade - has also hurt investor confidence.

US Dollar v Indian Rupee

Last Updated at 18 Apr 2014, 18:50 ET USD:INR three month chart
$1 buys change %
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-0.04

International investors have withdrawn nearly $12bn in shares and debt from India's markets since the beginning of June,

Analysts said the combination of all these factors was hurting the rupee and that the currency may fall even further.

"This is unprecedented and we are in uncharted territory for the rupee," said Vishnu Varathan, an economist with Mizuho, adding that he expected the rupee to fall to the 70 mark against the US dollar.

Piecemeal efforts?

For its part, the Indian government has taken various steps to stem the rupee's decline.

India's central bank has imposed restrictions on the amount of money that companies and individuals can send out of the country.

It has also increased the duty on gold imports, one of the biggest contributors to India's current account deficit, three times this year.

Recently it increased the interest rate at which it lends money to other banks and also put a cap on their daily borrowings.

However, despite those steps the rupee has continued to slide.

Mr Varathan said that investors were looking for more concrete action.

"The measures were very piecemeal, ad hoc, and there was some government flip-flopping, which didn't inspire a great deal of confidence," he said

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