MUMBAI—The Indian rupee fell to a new low against the U.S. dollar on Thursday, as global investors pulled out of emerging markets broadly amid concerns over the reduction of a U.S. program that has injected billions of dollars into the global financial system.
The rupee fell to 59.94 for one U.S. dollar within minutes after it opened for trading, but regained value later to trade at around 59.69. The Reserve Bank of India likely sold dollars when the rupee was trading at 59.85 for one U.S. dollar, according to three currency dealers in Mumbai.
In a bid to calm markets, India's Chief Economic Advisor Raghuram Rajan said Thursday that India's finance ministry and the central bank were ready to take action if needed to stabilize the rupee. "We aren't short of actions and instruments as and when the need arises," Mr. Rajan said at a news conference.
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Analysts Fear Rupee Will Breach 60
The sharp decline in the rupee sent Indian stocks and bonds tumbling.
The Bombay Stock Exchange's 30-share Sensex fell 2.2% in early trading to 18851.21 points. The benchmark 10-year government bond yields spiked on Thursday morning as many bond investors tried to cut losses by selling their holdings, as they feared that bond prices could fall further. Bond yields rise when prices fall.
Bond trading came to a halt for several minutes as there were no buyers for bonds, according to bond dealers. The benchmark 8.15% bond that is due in 2022 saw its yield jump to 7.57% soon after the market opened, versus 7.47% at Wednesday's close—a big move in the bond world.
Thursday's selloff was triggered by an announcement by the U.S. Federal Reserve which said that the U.S. economy was improving, and indicated that this could lead to a reversal of its existing program of buying bonds worth $85 billion a month.
This program had led to a flush of capital in the global financial system in recent years. Investors fear that as this program is rolled back, global funds will reallocate their investments to the U.S. dollar and equities, which now have better prospects and are considered a safer bet.
"Overseas markets were flush with easy money. Now, tapering off will slow down that flow," said Vikram Dhawan, a Mumbai-based director with market research firm Equentis Capital Pvt.
Such withdrawal has already led to sales of stocks and bonds across emerging markets and Asia.
For India, the selloff has been sharper because of its inherent economic problems, including a wide current-account deficit and slowing growth. Also, investors have been frustrated at the pace of economic reforms, saying the government hasn't opened up Indian industry enough for fresh foreign direct investments.
Investors are now worried that the rupee's sharp slide would exacerbate problems for India, as it would make imports of goods more expensive. "A falling rupee could further (widen) our current-account deficit," said Alex Mathews, head of research at brokerage Geojit BNP Paribas Financial Services 532285.BY -1.28% in Kochi, Kerala.
Investors fear that the rupee's decline isn't yet over.
