Mumbai: The rupee fell to the lowest level in more than five months as stock losses stoked speculation overseas investors will cut their holdings.
The currency declined by the most since 16 August after India’s benchmark share index had the biggest loss in six weeks.
The Morgan Stanley Capital International (MSCI) Asia-Pacific Index fell 3.2% — the most since 6 February, on concern the US is slipping into a recession. The rupee also weakened after a government report showed India’s trade deficit widened to a record in January.
“Equity market sentiment is quite negative across Asia and that’s affecting the rupee,” said L.V. Prasad, chief currency trader at IndusInd Bank Ltd in Mumbai. “Rupee traders are concerned the equity market slump could trigger outflows of foreign portfolio investment.”
The rupee weakened 0.9% to Rs40.37 per dollar — the lowest closing level since 18 September at the end of trading on Monday in Mumbai, according to data compiled by Bloomberg.
The Bombay Stock Exchange’s Sensex lost 5.1% the most since 21 January. The index has lost almost 18% this year, after advancing 47% in 2007.
Overseas funds sold Indian stocks worth $2.8 billion (Rs11,284 crore) this year, following record net purchases of $17.2 billion in 2007, according to data released by the Securities and Exchange Board of India, the nation’s capital markets regulator.
“Dollar outflows from the banking system have of late been bigger than inflows and this has created a dollar shortage that is putting pressure on the rupee,” said Ajay Mahajan, head of financial markets at Yes Bank Ltd in Mumbai.
The rupee also fell on speculation the nation’s widening trade deficit, or the amount by which the cost of imports exceed earnings from exports, will boost demand for the dollar.