Mumbai: The rupee had its biggest weekly decline in two months after the benchmark stock index slumped on concerns the US subprime mortgage contagion will spread.
The currency fell for the third day on speculation that overseas investors led the stock sell-off as they dumped riskier investments. The rupee, the best performer in Asia this year, was pushed to a nine-year high last month on foreign buying of local stocks. Overseas purchases of Indian shares already exceed those in the whole of 2006.
“Global funds are going to make a reassessment of risk and it is inevitable that assets of emerging markets such as India will be reduced further,” said R. Sridhar, senior vice-president and head of trading at Axis Bank Ltd in Mumbai. “Sentiment on the rupee is unlikely to revive soon.”
The rupee fell 0.7% to 40.64 versus the dollar this week in Mumbai - its biggest decline since the five trading days ended 8 June, according to data compiled by Bloomberg.
Global fund managers sold $570 million (Rs2,320 crore) of Indian equities more than they bought this month through 8 August, according to the Securties and Exchange Board of India. The fund managers bought a net $4.53 billion of stocks in July.
The Bombay Stock Exchange’s sensitive index, or Sensex, fell for the third week as stock indexes in Asia extended a global slump on concerns that subprime losses and a widening credit crunch will worsen.
The local currency also fell as India’s industrial output growth in June was the slowest in eight months.
Production at factories, utilities and mines rose 9.8% from a year earlier, the Central Statistical Organisation said in a statement in New Delhi. Analysts expected an 11% increase.
Indian bonds fell the most in a week since April, after the Reserve Bank of India (RBI) increased a yearly limit on its debt sales to absorb excess cash from the financial system.
RBI sells debt to drain surplus cash generated by its dollar buying in the currency market to slow a rally in the rupee that threatens exports. On 8 August, the central bank had raised the amount of so-called stabilization bonds it may sell in the fiscal year started 1 April by 36.4% to Rs1.5 trillion.
The decline in prices held the benchmark 10-year yield at its highest since 6 July, on concerns that a worldwide decline in stock prices will spur global funds to turn increasingly risk-averse, triggering capital outflows from emerging markets.
The central bank has sold stabilization debt and raised cash reserves for banks three times this year to absorb surplus money created by its currency market intervention. It raised, with effect from 4 August, the amount of cash banks must set aside as reserves to 7% of deposits from 6.5%.
“Inflation continues to be a key concern for the market as well as regulators,” Axis Bank’s Sridhar said. “In an economy that grows as fast as India, inflation is always a concern,” he added.
Amit Varma in Mumbai contributed to this story.