India's announced measures to tackle rupee weakness disappoint

The official announcements, says DBS, amounted to further incremental steps to liberalize the capital account, which only increase the dependence on debt capital inflows.

Here’s more from DBS Group Research:

Measures announced yesterday to tackle rupee weakness fell well short of official comments over the weekend that signaled some tough reforms / policy decisions might be taken in the wake of the sharp fall in the rupee.

Instead, the much awaited official announcements amounted to further incremental steps to liberalize the capital account, which only increase the dependence on debt capital inflows. Key policy announcements include a decision to increase foreign portfolio investment limits in government bonds to USD 20bn from USD 15bn previously, and to allow manufacturing and infrastructure companies with foreign exchange earnings to refinance INR debt (upto USD 10bn) with external borrowings (as long as it is intended for capital expenditures).

Market did not expect a miraculous speeding up of policy decisions despite optimistic official signals, but the policy decisions clearly disappointed even those muted expectations. Both stock and currency markets sold off after the announcement, with the SENSEX falling below the key 17000 mark and USD/INR testing and breaching 57 levels once more.