The rupee fell the most in two months on concern that sliding local equities will prompt global funds to reduce investments in the country. The currency fell to the lowest this month after the nation’s benchmark share index declined the most in four months. The rupee’s 12.1% gain this year was fuelled by record purchases of stocks and bonds by global investors, it is the second biggest among Asian currencies after the Philippine peso.
“The decline in stocks triggered selling in the rupee, which has fallen more than most people anticipated,” said Paresh Nayar, head of bonds and currency trading at Development Credit Bank Ltd in Mumbai. “The rupee’s decline forced traders short on dollars to cover those positions.” The rupee weakened 0.5% to 39.5425 per dollar as of the 5 pm close in Mumbai, according to data compiled by Bloomberg. That is the biggest decline since 18 October and the lowest closing level since 30 November.
“The rupee’s trend in the coming days will depend on the direction in stocks,” Development Credit’s Nayar said. The Bombay Stock Exchange’s Sensitive Index dropped 3.8%, the biggest fluctuation among markets included in global benchmarks and its largest decline since 16 August. The MSCI Asia Pacific Index lost 2.9% to 152.23 as of 7:14 pm in Tokyo, its sharpest decline since 17 August. Overseas investors more than doubled local equity purchases to an all-time high $17.2 billion (Rs67,768 crore) this year. Their debt investments rose to a record $2.02 billion.
The rupee also dropped on speculation that the central bank is increasing currency sales to curb gains that may be hurting exports. The Reserve Bank of India (RBI) said on 14 December it bought a record $12.5 billion of foreign currency in October, its 12th straight month of purchases. “The central bank has been buying foreign exchange and that’s keeping the dollar supported against the rupee,” said L.V. Prasad, chief currency trader at IndusInd Bank Ltd in Mumbai.
RBI’s currency purchases in the fiscal year that began 1 April rose 76% to $47.3 billion from the whole of the previous fiscal year, according to its latest monthly bulletin. The dollar purchases increased the nation’s foreign-exchange reserves to a record $273.6 billion as of 7 December, it said on 14 December.
Growth in merchandise exports slowed to an average 17% a month this year from 21% in 2006.