Mumbai: India’s rupee may drop a second week on concern equity purchases by global funds will slow after the benchmark stock index slumped, a survey of traders showed.
The local currency may snap six months of gains after an eight-month rally in the Bombay Stock Exchange Sensitive Index, or Sensex, faltered last week. The Sensex last week fell 5 % as the central bank reined in money supply to slow inflation.
“An expected correction in the stock market will keep the rupee under pressure,” said S.T.P. Venugopal, chief currency trader at state-owned Central Bank of India in Mumbai. “Equity flows from abroad will slow.”
The currency, which fell 0.2% last week to 44.21 against the dollar, will extend losses to 44.35, according to the median estimate of 11 traders.
Stocks also slumped last week on concern Finance Minister P Chidambaram will ban exports of cement to curb inflation and raise taxes on cigarettes when he presents the budget on 28 February for the year starting 1 April.
Shares of ICICI Bank Ltd., the country’s biggest lender by market value, and HDFC Bank Ltd. have dropped from a record on concern fewer customers will borrow as interest rates rise. The 16-member Bankex index, which comprises more than 90 % of the market value of Indian banking stocks, has dropped 11 % from a record reached on 8 February.
The Reserve Bank of India last month raised the overnight lending rate for the fifth time in a year, and told banks to set aside more cash to cover deposits, leaving them with fewer funds to lend.
The rupee, which rose to a 16-month high on 6 February, may be buoyed on optimism companies including Vodafone Group Plc. and Italy’s Fiat SpA will invest in the second-most populous nation to expand.
Central bank Deputy Governor Rakesh Mohan on 24 February told bond traders that the $854 billion economy is approaching a consistent economic growth rate of more than 9 %, and will be a $1 trillion economy by the year ending 31 March 2008.
“An increased momentum in FDI flows has altered the dynamics for the rupee,” said Vikas Agarwal, a Mumbai-based strategist at JPMorgan Chase & Co. “A gradual appreciation for the currency seems more likely.”
The third-biggest bank on 15 February abandoned its call for a weaker rupee this year, and said the currency may end at 44.25 against the dollar in December, higher than its previous forecast of 45.5.
The rupee may also decline this week on speculation refiners including Indian Oil Corp., the country’s biggest, will buy dollars to settle their month-end import bills, said V. Rajagopal, chief currency trader at Kotak Mahindra Bank Ltd. in Mumbai.
The central bank may also stem the currency’s gains to prevent a stronger rupee from hurting exporters, he said. The rupee has traded between 44.025 and 44.2938 this month.
The country’s foreign-exchange reserves rose $3.8 billion in the week ended 16 February, following a record $5 billion addition in the prior week, according to data provided by the central bank. The accumulation suggests the central bank may have purchased dollars to keep the rupee from strengthening.
“With the month-end demand for dollars from refiners, the central bank’s task appears easier,” said Rajagopal. “In any case they will keep watching the market and act as and when the rupee rises.”
In the forwards market, investors who want to buy dollars a year from now using rupees need to pay 3.01 % more than the current exchange rate in the cash market, Bloomberg data show. Exporters may book forward contracts to take advantage of the premium, Rajagopal said.