Policy announcements are crucial for substantially reducing upside pressure on USD-INR, Standard Chartered said in a research note on Monday."INR losses pose significant downside risks to positive economic trends and in turn, portfolio flows. India's unstable politics and slow pace of reforms add to the downside risks," the research note said.
The rupee had touched life-time low of nearly 60-level in intra day trade last week after US Fed's indications of a phased stimulus exit spooked global markets.
In morning trade today the Indian currency fell by 40 paise to 59.67 in early trade on the Interbank Foreign Exchange market, on fresh dollar demand tracking strengthening of the US currency overseas.
According to the brokerage firm, the onus is now on policy makers to boost capital inflows and provide support to the INR.
Quicker policy reforms are needed to substantially ease upside pressure on USD-INR, but this is unlikely ahead of the 2014 general elections, StanChart added.
Among other negative effects, StanChart estimates that sustained INR weakness of 10 per cent is likely to add 1.5-2.0 points to headline inflation, eroding the possibility of further RBI rate cuts.
Possible government measures include measures to boost inflows/stem INR losses, non-resident Indian (NRI) bond issuance and lower net overnight open position limits (NOOPL) for banks.
Moreover, the policy announcements that are likely to instil investor confidence include natural gas price hike, revamped FDI policy and introduction of insurance/pension bill in the next parliament session, the report said.