Rupee Weakens Past 50 Against Dollar Spurring Speculation RBI May Step In By Jeanette Rodrigues - Oct 21, 2011

India’s rupee fell past the 50 per dollar level for the first time in more than two years on speculation slowing economic growth and faster inflation will deter foreign investment.

The currency was poised for its biggest weekly loss this month after China reported Oct. 18 that its third-quarter gross domestic product increased at the slowest pace in two years. Food inflation in India accelerated to 10.6 percent in the week ended Oct. 8 from a year earlier, the fastest rate since April, government data showed yesterday. Concern Europe’s debt crisis is worsening also sapped demand for emerging-market assets.

“The growth outlook has weakened and inflation remains stubbornly high,” said Jonathan Cavenagh, a Singapore-based senior currency strategist at Westpac Banking Corp. “European investors invested a lot of capital in Asia when the 2008 financial crisis eased and now there is concern they will pull this back. India stands to lose more than its peers as the country is running a current-account deficit.”

The rupee slid 0.5 percent today and 2 percent this week to 50.05 per dollar as of 11:43 a.m. in Mumbai, according to data compiled by Bloomberg. It touched 50.19 earlier, the lowest level since April, 2009. The currency has declined 11 percent this year, the worst performance among Asia’s 10 most-traded currencies.

India’s growth in the year through March may be lower than earlier estimates, Finance Minister Pranab Mukherjee said on Oct. 19. Asia’s third-largest economy grew 7.7 percent in the three months through June from a year earlier, the smallest gain since 2009, government data show.
Possible Intervention

India’s current account, the broadest measure of trade and investment flows, showed a deficit of $14.1 billion in the three months through June, compared with a shortfall of $5.4 billion the previous quarter, the central bank said last month.

Importers increased purchases of dollars ahead of public holidays next week on concern Europe’s debt crisis will worsen, said Kamlakar Rao, head of foreign-exchange trading at state-run Allahabad Bank. Local financial markets are shut on Oct. 26 and 27 for the Diwali festival, when Indians traditionally purchase precious metals.

“There was a lot of demand for dollars from gold and oil importers,” Mumbai-based Rao said. “The Reserve Bank of India would be concerned about this move.”

The RBI will likely intervene to support the rupee if concern Europe’s debt crisis will worsen threatens to push the currency past 50.35 a dollar, said J. Moses Harding, an executive vice president at IndusInd Bank Ltd. in Mumbai.

The central bank may intervene should the currency fall to levels reached during the financial crisis, a Finance Ministry official told reporters in New Delhi on Sept. 23, requesting not to be identified as he isn’t authorized to speak on the matter. The rupee dropped to a record-low 52.18 per dollar in March 2009.
Europe Concern

The currency has weakened as concern Europe’s debt turmoil will slow global growth resulted in investors favoring the relative safety of the dollar over emerging-market assets. South Africa’s rand has dropped 19 percent in 2011, the worst among 25 developing-nation currencies tracked by Bloomberg. In Asia, the Taiwan dollar fell 3.8 percent and the Thai baht 3.5 percent.

“Concern the European crisis will drive the dollar higher is on investors’ minds,” IndusInd’s Harding said. “In the earlier period of weakening the rupee largely tracked the Dollar Index but this time it has far exceeded the move.”

The Dollar Index, which measures the currency’s performance against six major trading partners, rose 0.4 percent this week.
Rebound Expected

Offshore forwards indicate the rupee will trade at 50.91 to the dollar in three months, compared with expectations of 50.41 yesterday and 49.69 at the end of last week. Forwards are agreements to buy or sell assets at a set price and date. Non- deliverable contracts are settled in dollars.

The rupee will rebound to 48.60 per dollar in the next few weeks, said Sailesh K. Jha, Singapore-based head of Asia strategy at Skandinaviska Enskilda Banken AB. Investors will return to risky assets, dollar-demand from oil importers will ease and interest-rate differentials will widen, he said.

The RBI will increase its repurchase rate by a quarter of a percentage point to 8.50 percent when it meets on Oct. 25, according to 13 of 19 analysts in a Bloomberg Survey. Six expect no change.

SEB predicts the rate will rise to 9 percent by March 2012, while Westpac’s Cavenagh said he sees the RBI cutting interest rates in the first quarter next year. Central bank rates stand at less than 1 percent in the U.S., 1.5 percent in the euro area and China’s key lending rate is 6.56 percent.

“We expect improvements in risk sentiment in the near-term on the back of our view that European Union policy makers will not disappoint the market significantly and macro data will surprise on the upside in Asia,” Jha wrote in a report published today. He advises buying the rupee at 50.30 per dollar.

To contact the reporter on this story: Jeanette Rodrigues in Mumbai at jrodrigues26@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net.
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