Mumbai: The rupee fell to a record low on concern overseas funds will increase sales of local equities amid mounting signs the global economic slump and financial turmoil are deepening.
The currency weakened for a seventh day, the longest losing streak since October, as foreigners sold more Indian shares than they bought on all but five of the 19 trading days last month. The Bombay Stock Exchange’s benchmark index, Sensex, dropped 2.1%, following a 4.7% slide in the US Standard and Poor’s 500 Index on Monday, after American International Group Inc. (AIG) reported the biggest loss in US corporate history.
“The trend is clear, we are going to have more rupee weakness,” said Agam Gupta, head of trading at Standard Chartered Plc. in Mumbai. “Risk aversion is the main theme.”
The rupee slid as much as 0.5% to an all-time low of 52.185 a dollar before trading at 51.985 at close in Mumbai, according to data compiled by Bloomberg.
The rupee is the third worst performer in the past 12 months among the 10 most traded Asian currencies, with a 22% loss. South Korea’s won and Indonesia’s rupiah have declined more.
The US economy, the world’s biggest, shrank at the fastest pace since 1982 last quarter, a government report showed on 27 February. India’s economy, Asia’s third biggest, expanded at the slowest pace in five years.
AIG, the insurer deemed too important to fail, will get as much as $30 billion (Rs1.55 trillion) in new government capital and relaxed terms on its bailout after fourth-quarter loss widened to $61.7 billion, from $5.29 billion a year ago.
The Sensex lost almost 13% this year, following a record 52% slide in 2008. The MSCI Asia Pacific Index dropped 10% last month, while the S&P 500 declined 11%.
Funds based abroad sold $1.72 billion more Indian equities than they bought this year, adding to 2008’s record $13.3 billion in net sales, according to data released by the Securities and Exchange Board of India.
Offshore contracts indicate traders bet the rupee will trade at 52.33 to the dollar in a month, compared with expectations for a rate of 52.38 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.
The rupee’s losses were limited by speculation the Reserve Bank of India (RBI) will sell foreign currency from its reserves to limit volatility in the exchange rate. Central banks intervene by arranging sales or purchases of currencies to influence exchange rates.
An RBI report showed on 27 February that reserves slid 21% from an all-time high of $316.2 billion reached in May 2008, suggesting the monetary authority increased dollar sales. The bank has been intervening in the market to smooth rupee movements, acting finance minister Pranab Mukherjee said last week.
“The central bank is expected to intervene in the currency market following the sharp recent declines in the rupee,” Standard Chartered’s Gupta said.
Implied volatility on one-month dollar-rupee options climbed to 17% on Monday, the most since 12 January. It was at 16.75% on Tuesday. Traders quote implied volatility, a gauge of expected swings in exchange rates, as part of pricing options.