INR weakness has accelerated the last few days as India faces a perfect storm of negative factors. With policy measures in the realm of 'no good options', there remains the risk that INR weakness will accelerate further to beyond 70.
The crisis for EM has most affected those with bad fundamentals. India, with its large c/a deficits and high inflation, is close to the top if not at the top of the list. With the Fed likely to taper QE as early as the September FOMC meeting, the market is becoming more averse to EMs that have relied on hot money flows to help finance their c/a deficits.
India’s biggest problem, though, has been itself through the manic and confused response from policymakers. Instead of being proactive, the RBI and FinMin have chosen to be reactive, hoping that the other will be more willing to calm nervous markets. The RBI's attempts at monetary tightening have been seen as temporary and not credible for an economy still facing downside growth risks. The FinMin's measures to bolster more sustainable funding can be put in the category of 'too little too late'.
