* Indian rupee hits record low of 68.75; RBI intervenes
* Indian shares slump, but recover on state firm buying
* Foreign investors turning heavy sellers of Indian shares
By Abhishek Vishnoi and Himank Sharma
MUMBAI, Aug 28 The Indian rupee slumped to a
record low of more than 68 to the dollar on Wednesday on growing
worries that foreign investors will continue to sell out of a
country facing stiff economic challenges and volatile global
The pummelling in markets - which sent the rupee
reeling as much as 3.7 percent to an all-time low of 68.75 -
forced the central bank to intervene while state-run Life
Insurance Corp was spotted buying shares, allowing domestic
indexes to erase steep early losses.
"If steps are not taken to implement the reforms necessary
to tackle the structural issues, the government will be left
with the so-called '3D options': debt default, devaluation,
deflation," said Angelo Corbetta, head of Asia equity for
Pioneer Investments in London.
"In India devaluation is happening now and deflation could
be about to start. The good news is that the debt default is
Foreign investors sold almost $1 billion of Indian shares in
the eight sessions through Tuesday - a worrisome prospect given
stocks had been India's one sturdy source of capital inflows.
If more foreign investors throw in the towel, traders fear
it will put the country at risk of a vicious cycle in which the
ensuing hit to confidence in turn slams shares and the currency
Policymakers have consistently struggled to come up with
steps that can convince markets they can stabilise the rupee and
attract funds into the country despite extraordinary measures
last month by the central bank to drain liquidity and action to
curb gold imports and cut India's huge oil import bill.
The partially convertible rupee clawed back some
ground later in the day and was at 67.92 as of 1015 GMT, after
posting its biggest daily percentage fall in 18 years on
Still, an assault on the psychologically key 70 level
RISING OIL PRICES, FED FEARS AMPLIFY PRESSURE
India badly needs foreign capital as it struggles with a
record high current account deficit, growing fiscal pressures
and an economy growing at the slowest in a decade.
The failure to address India's economic challenges is
becoming an increasing source of tension at a time when fears of
a possible U.S.-led military strike against Syria are knocking
down Asian markets, with the prospect that the Federal Reserve
will soon end its prolonged period of cheap money further
At the same time, rising domestic bond yields threaten to
raise borrowing costs across the already slowing economy, while
global prices of oil and gold - the country's two biggest
imports - have surged this week.
"The end game for the current decline would be the day the
rupee stops falling, alongside government measures like a
substantial diesel price hike," said Samir Arora, a fund manager
at Helios Capital in Singapore.
BNP Paribas on Wednesday slashed its economic growth
forecast for India for the fiscal year ending in March to 3.7
percent from its previous 5.2 percent - the weakest growth since
1991-92 when India buckled under a balance of payments crisis
that required a loan from the International Monetary Fund.
"India's parliament remains toxically dysfunctional with
little, if any, business conducted," BNP said.
"And, with next year's general election looming ever nearer,
the government's willingness to instigate a politically
unpopular fiscal tightening is close to nil."
India is due to post April-June gross domestic product data
on Friday, with analysts estimating the economy grew at an
annual rate of 4.7 percent, roughly in line with the previous
quarter. It will also post July federal fiscal deficit figures.
The rupee has fallen around 19 percent this year, by far the
biggest decliner among the Asian currencies tracked by Reuters.
Meanwhile, India's main National Stock Exchange index
fell as much as 3.2 percent, although suspected buying
by LIC led the index to recover in the afternoon.
Foreign investors are paring equity positions, having sold a
net $3.5 billion in stocks since the start of July, although
their net purchases so far this year still total $12 billion.
Among the blue chips that fell the most on Wednesday were
Axis Bank Ltd and ICICI Bank Ltd, a concern
given foreign investors had so far largely held on to their
investments in lenders, owning more than 40 percent of each.
In bond markets, foreign investors have sold more heavily,
with outflows reaching $4.5 billion so far this year.
Yet the government has so far failed to provide a coherent
response, analysts said. Its approval of infrastructure projects
on Tuesday was trumped by concerns about the fiscal deficit
after India's lower house of parliament this week approved a
1.35 trillion rupees ($20.47 billion) plan to provide cheap gain
to the poor.
In its latest initiative, the government late on Tuesday
proposed setting up a task force to look into currency swap
agreements, a measure analysts said could bring some relief if
carried out in time by reducing market demand for dollars or
other major currencies.
"Lets see what the authorities do, but if the government can
come out with some really big currency swap arrangement with
some countries, that can be a strong positive," said Uday Bhatt,
a forex dealer with UCO Bank in Mumbai.