The rupee closed near the lowest in five weeks on speculation that a slump in stocks will prompt global investors to pull out their funds.
The Sensex, on Wednesday, dropped the most in eight months after finance minister P. Chidambaramincluded a tax increase on dividends in his Budget. The rupee may fall after recent central bank purchases of dollars made the U.S. currency more expensive as companies seek to pay interest on overseas loans before the financial year ends on 31 March.
“The trend now is for the rupee to weaken, and the extent depends on how much more stocks can correct,” said Vikas Babu, a currency trader at state-owned Andhra Bank in Mumbai. “The pressure to weaken will also be more pronounced as the fiscal year ends and demand for dollars exceeds supply.”
The rupee ended the day at Rs44.2625 a dollar at 5pm in Mumbai, compared with Rs44.2762 on Wednesday, according to data compiled by Bloomberg. It may fall to Rs44.5 this month, Babu said.
The Sensex slid 8.2% in February, its first monthly decline since May 2006, as some investors judged gains that doubled it in the past two years as possibly overdone. A report on Wednesday showed economic growth unexpectedly slowed to 8.6% last quarter, from 9.2% in the previous three months.
The currency erased early losses after the index rebounded 1.7% on Thursday, following yesterday’s 4% drop.
The central bank probably purchased dollars to stem gains in the local currency after it advanced 5.1% in the six months through January, data provided by the central bank show.
Foreign-exchange reserves, which provide an indicator of central bank currency purchases, rose $3.8 billion in the week ended 16 February, following a record addition of $5 billion the prior week, the Reserve Bank of India (RBI) said on 23 February.
“There’s been a lot of support for the dollar at these levels from RBI and people have sold dollars, betting the rupee will appreciate,” said Ravi Pai, chief of currency trading at HDFC Bank in Mumbai. “When payments are due in the next couple of months, we’ll see a weaker rupee.”
The currency may drop to Rs45.2 against the dollar in two months, Pai said.
In the forwards market, investors who want to sell dollars a year from now using rupees receive 3% more than the current exchange rate, compared with 3.16% on Wednesday.
The rupee may also decline on concern that a surge in crude-oil prices will increase import costs for Asia’s fourth-biggest economy, which depends on imports to meet three-fourths of its energy needs.