Mumbai: The rupee dropped the most in three months on speculation the nation’s current-account deficit will swell as a global recession hurts exports.
The currency slid to a two-month low after the benchmark stock index, the Sensex, posted the biggest two-day slide in more than a month on concern the government’s plan to borrow record amounts will drive up borrowing costs for businesses and consumers.
Commerce minister Kamal Nath said on 13 February that overseas sales may increase 15% in the year ending 31 March, compared with an earlier target of 23%.
The rupee will continue to have a weak undertone because of the deterioration of the current-account balance, said Krishnamurthy Harihar, treasurer at Development Credit Bank Ltd in Mumbai. Exports are slowing because of the poor global economic climate and imports are growing.
The rupee fell 1.7% to 49.67 per dollar in Mumbai, according to data compiled by Bloomberg. That’s the biggest decline since 12 November and the lowest closing level since 4 December.
The median estimate of 25 strategists and economists surveyed by Bloomberg is for the rupee to end the current quarter at 49.06.
The current-account deficit, a broad measure of trade flows, widened to a record $12.5 billion (Rs61,500 crore) in the last quarter, according to the central bank.
The Mumbai stock market index, the Sensex, fell 2.9%, extending Monday’s 3.4% loss.
Prime minister Manmohan Singh’s government is borrowing more to fund spending to revive Asia’s third largest economy. Growth may slow to 7.1% in the year ending 31 March, the weakest in six years, according to government estimates. Singh, bracing for a general election due by May, announced a 21% pay increase for about five million government employees and waived $17 billion of farm loans this fiscal year.
Spending will rise 6% to Rs9.53 trillion in the next fiscal year, foreign minister Pranab Mukherjee told Parliament on Monday.
That will result in a budget gap of 5.5% of gross domestic product by 31 March 2010, compared with a 3% target, he said. Borrowing in the year starting 1 April will be Rs3.62 trillion.
“We expect the rupee to depreciate,” said K. Ramanathan, who helps manage the equivalent of $500 million at ING Investment Management in Mumbai. “Exports have dwindled. Capital flows are not positive. The only saviour is the foreign direct investment (FDI). We need to see if the good FDI number is sustainable going forward. We doubt so.”
Offshore contracts indicate traders bet the rupee will trade at 50.12 to the dollar in a month, compared with expectations for a rate of 49.00 on Monday. Forwards are agreements in which assets are bought and sold at current prices for future delivery. Non-deliverable contracts are settled in dollars rather than the local currency.
India’s overseas shipments fell 22% in January from a year earlier, declining for the fourth month in a row, according to trade secretary G.K. Pillai.
The slump may continue for several months, Pillai had said in a 28 January interview.