Rupee slump shows skepticism over Modi’s reform resolve

The Indian rupee has plunged almost 5 percent against the greenback since pro-business Prime Minister Narendra Modi swept to power in May – so what`s behind the currency`s fall and where is it headed next? Foreign exchange strategists point to a confluence of factors behind the currency`s recent weakness starting with skepticism over the Modi-led Bharatiya Janata Party (BJP) government`s resolve to usher in economic reforms.

“The market is disappointed with the recent budget and a lack of fresh initiates from the new government,” Nizam Idris, head of strategy, fixed income and currencies at Macquarie told CNBC. Since the election, there has been closer scrutiny on the nature and pace of reforms to boost long-term growth and curb inflation in Asia`s third largest economy.

Modi`s maiden budget, delivered in July, failed to live up to the market`s high expectations of big bang reforms. Analysts described it as a step in the right direction, but critiqued it for being short of specifics on a number of key issues, in particular how it plans to achieve a fiscal deficit target of 4.1 percent of gross domestic product (GDP) for the financial year 2014-2015, from 4.5 percent in the previous year.