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Indian rupee sinks to record low as economy edges closer to disaster

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Indian rupee sinks to record low as economy edges closer to disaster

The Indian rupee is trading at record lows after a failed attempt by government officials to restore confidence in an economy that is teetering on disaster. Market participants are concerned about India’s ballooning account deficit, largely a result of the country’s massive trade imbalance. India, which is home to 1.2 billion, is heavily reliant on foreign capital, importing far more goods and services than it exports. Last week Indian Finance Minister Palaniappan Chidambaram vowed to cut the country’s account deficit from 4.8 percent of GDP to 3.7 percent by the end of the next fiscal year. His announcement failed to generate an immediate rally, as the Indian markets continue to plunge one week later.

The Mumbai Sunsex, India’s benchmark index, declined another 1.56 percent Monday to 18,307.52. Indian stocks have declined more than 3 percent over the past five days and more than 7.7 percent over the past month. The Indian rupee (INR) fell more than 2.2 percent against the US dollar Monday, and over the past five days has declined more than 4 percent. Year-to-date, the rupee has lost more than 12.5 percent against the greenback.

Precipitating India’s fall are talks of tighter US monetary policy, as speculation over Federal Reserve bond tapering continues to grip the markets. The benchmark US indices have declined to their lowest levels since last year, as investors hedge their bets against higher lending rates and reduced stimulus.

Like Finance Minister Chidambaram, Indian Prime Minister Manmohan Singh has failed to restore faith in the economy. Despite attempts to reassure investors the government has enough foreign reserves to defend the fledgling rupee, India’s rising inflation, massive trade deficit and slowing economy have counteracted any attempt to shore up confidence.

Indian policymakers have introduced a series of measures to save the rupee from further debasement, including limiting the import of gold and restricting the amount of money Indian citizens and corporations can take out of the country.

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