Mumbai: The rupee declined the most in a week on speculation that a slide in Asian equities will prompt investors to reduce investments in the region.
The currency and stocks fell on concern that global funds will buy fewer emerging market assets after the US Federal Reserve on Tuesday cut interest rates less than some traders expected. The MSCI Asia Pacific Index fell the most in three weeks.
“The rupee opened weaker today because of losses across Asian equity markets,” said Agam Gupta, head of trading at Standard Chartered Plc. in Mumbai.
“The market sentiment was damped a bit after the Fed announced a smaller-than-expected rate cut,” he said.
The rupee declined 0.1% to 39.37 to the dollar at close, according to data compiled by Bloomberg.
The currency, which earlier weakened to 39.4275, had the biggest loss since 5 December.
Asian stocks declined after the Federal Reserve said the US economic growth is slowing and Morgan Stanley said Japan may enter a recession.
The MSCI Asia Pacific Index fell 1% as of 7.22pm in Tokyo, set for its largest drop since 21 November.
India’s benchmark share index rose 0.4% to a record.
US policymakers cut their benchmark rate to 4.25% from 4.5% to prevent a housing slump from slowing growth in the world’s biggest economy. Before the decision, traders had priced in about a 40% chance the Federal Reserve would lower the rate to 4%.
The Reserve Bank of India’s benchmark rate is 7.75%, the highest in five years.
The rupee pared losses on speculation lenders will buy the currency to boost cash ahead of quarterly corporate tax outflows from the banking system due by 15 December. Banks may sell dollars for rupees to avoid costlier money market borrowings.
“This week is likely to see some added appreciation pressure on the rupee due to tax outflows resulting in tighter liquidity conditions,” Siddhartha Bhotika, Mumbai-based currency economist at ICICI Bank Ltd, said in a research note.
The overnight borrowing rate in the local money market rose to 7.72% on Wednesday, the highest this month.
The currency’s decline was curbed after a government report showed industrial growth accelerated.
Industrial production in Asia’s third biggest economy increased 11.8% from a year ago, up from September’s revised 6.8% rise, the statistics office said in New Delhi on Wednesday.
Economists expected a 10% gain. China’s industrial output grew 17.9% in October.