Mumbai: The rupee fell, completing its biggest weekly loss of the year, as a deepening global economic slump saps demand for emerging market assets.
The currency traded near an 11-week low versus the dollar and the Bombay Stock Exchange’s benchmark index, the Sensex, fell 8.2% this week, it’s largest slide in almost four months. Funds based abroad increased net sales of Indian stocks this year to $1.3 billion (Rs6.48 trillion) as central bank governor D. Subbarao said on 18 February the impact of the global recession on the domestic economy has been much sharper than expected.
Pressure has increased on the rupee to weaken because of fears of bigger capital outflows, said K.V. Mallik, a Kolkata-based treasurer at state-owned UCO Bank. The equity market outlook is weak. The rupee is also lower because of some arbitrage between the local and offshore forward markets. The rupee weakened 2.2% this week to 49.755 per dollar, according to data compiled by Bloomberg. The currency, which slid 0.3% on Friday, reached 50.0625 on 18 February, the weakest since 3 December.
Offshore forwards contracts indicate traders bet the rupee will trade at 50.24 in a month, compared with expectations for a rate of 48.83 on 13 February.
Union commerce minister Kamal Nath said on 13 February that overseas sales may increase 15% in the year ending 31 March, compared with an earlier target of 23%. Shipments fell as much as 17% in January, declining for the fourth month in a row, trade secretary G.K. Pillai said on Thursday.
The current account deficit, a broad measure of trade flows, widened to a record $12.5 billion last quarter, from $9.8 billion in the previous quarter, according to the central bank.
The rupee will slump to a record low of 53 per dollar by the end of the year as the current account and fiscal deficits widen, Morgan Stanley said.
The currency will weaken as foreign funds become more risk averse due to the global financial turmoil, Stewart Newnham, a strategist with Morgan Stanley, wrote in a report on Friday. The risk of a credit rating downgrade may also accelerate portfolio outflows, he said.
Downward pressure on the rupee may intensify under the weight of twin current and financial account deficits, especially during bouts of risk aversion, Hong Kong-based Newnham wrote. The country’s financial account bubble is unwinding, while it still runs a current-account deficit.
The weak fiscal position of the Union and state governments poses the risk of a rating downgrade, according to Newnham. Standard and Poor’s rates India’s local- and foreign-currency debt BBB-, the lowest investment grade.
We believe India’s investment-grade rating is at risk, Newnham wrote. The capital outflows from portfolio rebalancing that would ensue could be large, in our opinion.
The government is borrowing record amounts to fund stimulus spending as the economy is set to expand at the slowest pace in six years. Gross domestic product may rise 7.1% in the year to 31 March, compared with 9% last fiscal year, according to government estimates.