Rupee recovery sparks talk of central bank buying The Indian rupee made a modest recovery on Tuesday afternoon after earlier falling below Rs64 to the US dollar, arousing suspicions of intervention by the Reserve Bank of India. The rupee fell as far as Rs64.1 to the dollar before recovering to trade at Rs63.5. "The market suspects that the RBI was there selling dollars and that in itself is big, as the market draws comfort even if they are intervening a small amount," said Anubhuti Sahay, an economist at Standard Chartered. "Since July 31, we have moved almost Rs4 and probably that's why we have this intervention," she said, adding that the central bank's policy is to stem volatility rather than defend a certain level. Indian equities were also hurt by the negative sentiment battering markets in Asia's third-largest economy. The benchmark Sensex index was down 0.8 per cent by mid-afternoon at 18,156.05, but off earlier lows beneath 18,000. Market confidence has fallen sharply in the past week following policy measures aimed at reducing pressure on the currency, such as restrictive capital controls and increases in the import duty on gold, which have had the perverse effect of signalling desperation rather than fostering stability. New Delhi's seeming inability to protect its currency has raised concerns about a potential pullout among foreign investors, who own roughly half of the freely traded Indian shares but are yet to withdraw large amounts of capital. The central bank will be in a difficult position when it makes its decision on monetary policy next month. Tightening policy to support the rupee would constrain economic growth, which has already slowed dramatically, while loosening policy would fuel inflation and send more mixed signals to an already floundering market. The rupee's slide began in earnest in May, triggered by worries about an impending tapering of the US Federal Reserve's quantitative easing programme. "We are taking it on the chin for now, but some other funds may well be pulling out; it's hard to tell," said one fund manager with significant investments in Indian equities, who spoke on condition of anonymity. The worsening market conditions have also led to increasingly sharp criticism of the government and the central bank. Although many economists have backed attempts to support the rupee by constraining liquidity, some are now calling openly for a change of course as the currency continues to slide. They have made a mess of this. It is clear that this approach isn't working at all, given it is not protecting the rupee but it will definitely harm growth," said Andrew Holland, chief executive of Ambit Investment Advisors, a Mumbai-based hedge fund. There now needs to be a complete change of direction where they increase petrol prices to help the current account deficit and reduce interest rates, and basically let the rupee go where it will.