India's central bank has spent the last few weeks making a concerted effort to prop up the battered rupee, but its latest rhetoric may have already undone that hard work with the currency back within sight of record lows against the dollar.
The rupee weakened to a two-week low at about 59.92 per dollar on Tuesday, reversing all the gains made since the Reserve Bank of India (RBI) said earlier this month that it would support its currency via monetary tightening measures.
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The fall in the rupee followed a statement from the central bank on Tuesday after its monetary policy meeting in which it said it would unwind the recent liquidity tightening measures when stability returns to the currency market.
"The RBI has alluded to rolling back the rupee-supportive measures and that sends a message to the market that it implemented those measures in a half-hearted way," said Vishnu Varathan, market economist at Mizuho Corporate Bank in Singapore.
"Its communication could have been better since it needs to distinguish between what is good for the economy and what is good for the rupee."
The rupee weakened to a record low of 61.21 per dollar on July 8. It has fallen sharply since May as investors pulled cash out of India on expectations that the U.S. Federal Reserve could start to wind back the asset-purchase program that has pumped billions of dollars into global markets in the past few years.
"It seems slightly strange for the RBI to tell the market that it will unwind the liquidity tightening measures as and when the currency has stabilized," analysts at Credit Suisse said in a note. "After all, by indicating such an approach, it presumably makes it less likely that stability will actually be achieved."
