Rupee, stocks rally as new RBI chief fuels confidence

By Rafael Nam and Swati Bhat

MUMBAI (Reuters) - The rupee rallied and shares surged on Thursday after the Reserve Bank of India (RBI) chief unveiled a slew of measures to support the ailing currency and open markets, providing a shot of confidence for investors unnerved by the country's worst economic crisis in two decades.

The rupee rose as much as 2.3 percent to 65.53 per dollar, well off the record low 68.85 hit on August 28. The Indian unit was trading at 66.01 at 1215 IST.

The Sensex gained 2.3 percent and the Nifty rose 2.7 percent (at 1215 IST), propelled by lenders such as HDFC Bank, which surged after the new measures included increasing overseas borrowing limits for banks.

However, amid the euphoria over RBI Governor Raghuram Rajan's strong Wednesday debut, economists warned he cannot by himself solve the challenges in an economy facing a sharp growth slowdown and a record high current account deficit, which have fueled a 16 percent slide in the rupee so far this year.

The government has failed to push through politically tough reforms needed to fix the economy, and elections due by next May instead raise the prospect of expensive populist spending that could threaten the country's sovereign credit rating, which is one notch above junk status.

"To a certain extent, the recent rupee tumble and instability in the financial markets, has been a crisis of confidence. To that end, the path of action provided by the new governor and the stress on keeping communications predictable and consistent will be a welcome move," Radhika Rao, an economist at DBS in Singapore, said in an email to clients.

"Still, the external drivers of the rupee weakness will continue to dictate the momentum, along with the urgent need to address domestic structural pitfalls - fiscal and current account deficits, along with reviving investment activity."

At least for Thursday, Indian markets reflected the optimism placed on Rajan, a former chief economist at the International Monetary Fund who unexpectedly unveiled a flurry of proposals in his first day at the helm of the central bank.

In terms of action to prop up the rupee, the measures included providing exporters and importers more flexibility in hedging their forward currency contracts, as trading firms had long complained about regulations that left them unable to quickly cope with rapid currency movements.

"The statement is impressive and a must-read, in our view," Deutsche Bank said in a note.

"India's myriad cyclical and structural impediments will continue to hold back the economy for the time being, and risks of a deeper crisis are non-trivial, but (Wednesday's) statement shows a fresh and cohesive vision of monetary and financial sector policy from a newly appointed central bank governor can shine a much-needed light on India's promise and potential."

India's defence of the rupee has so far relied on controversial steps taken by the RBI, which have included draining cash from the market, raising short-term interest rates and imposing capital controls on resident Indians.

Investors have expressed little faith that the government can push through substantial reforms, such as a hike in subsidised fuel prices, that could help revive confidence in the economy.

Asia's third-largest economy is suffering from a dearth of investment and sharp slowdowns in the manufacturing and services sectors.

(Additional reporting by Subhadip Sircar; Editing by Tony Munroe & Kim Coghill)