Mumbai: The rupee will fall 7% by the year-end as overseas investors sell the Indian stocks and a decline in capital inflows widens the current-account deficit, according to Barclays Plc.
The currency will weaken to a 20-month low by 31 December as the broadest measure of trade will worsen in the fiscal year ending 31 March due to the decline in investment inflows, said Peter Redward, head of research for emerging Asia at the bank.
Barclay’s forecast for the rupee is more bearish than all the 26 respondents in a survey conducted by Bloomberg News.
“We are likely to go through a situation where investors step away from the market,” Singapore-based Redward said in a telephone interview. “That will create pockets where the capital inflows don’t match the current-account deficit and weaken the currency.”
The rupee closed at 42.74 per dollar Tuesday in Mumbai, according to data compiled by Bloomberg. It touched a 15-month low of 43.4750 on 1 July. The currency will fall to 44 by 30 September and 46 by 31 December, the lowest since September 2006, Barclays said.
India’s current-account deficit widened 78% in the fiscal ended March to a record $17.4 billion (Rs74,298 crore), or 1.9% of gross domestic product (GDP), the central bank said on 30 June. The shortfall may increase to 2.75% of GDP this fiscal year, Redward said.
“Investors looking at the currency are primarily focused on the dynamics of the balance of payments and the concerns about funding the current-account deficit,” Redward said. “Capital inflows are scarce in this environment, which is a downside risk to the rupee.”
Overseas investors have sold $7 billion more Indian shares than they bought this year, after making net purchases of $17.2 billion in 2007, according to data from the Securities and Exchange Board of India.
The widening budget deficit is also keeping away global investors. The shortfall may rise to 4% of GDP this fiscal, from 2.8% in the last 12 months, as the government pays more to subsidize fuel and food, Barclays said. The government plans to give oil companies Rs94,600 crore of bonds this fiscal to compensate them for selling fuel below cost but it did not include the bond issuance in the Budget.
Meanwhile, UBS AG said investors should hold long positions in the rupee, betting the currency will gain as the Reserve Bank of India raises interest rates to curb inflation.