New Delhi / Mumbai: The rupee fell on Thursday, on speculation that the Left parties, key allies of Prime Minister Manmohan Singh’s coalition government, will withdraw support.
The currency reversed its morning gains after a top leader of one of the Left parties told lawmakers that they haven’t reached an agreement with the government over its nuclear accord with the US.
The benchmark stock index fell 0.6% after rising as much as 2.2% early on Thursday.
“The rupee may touch 42 if the government does indeed fall,” said Roy Paul, assistant general manager of treasury at Federal Bank Ltd in Kochi. “The market is still hoping for some reconciliation between the parties, and that is the reason the rupee is holding these levels.”
The rupee fell as much as 0.7% to 41.19 against the dollar before closing at 41.04 in Mumbai, according to Bloomberg data.
The currency pared losses after Prakash Karat, general secretary of the CPI(M), said that he doesn’t want to bring down the government. Exporters bought the currency after the statement spurred optimism that the government has time to resolve differences with its Communist allies.
Still, the Union government should not proceed with the deal, Karat reiterated.
A withdrawal of support by the Communists may force Singh to hold elections an year-and-a-half before his term ends, hindering plans to plug a power shortage that is shaving 2 percentage points off of India’s economic growth.
The deal, if signed, will allow India to buy reactors and fuel from abroad.
Singh on Wednesday told visiting Japanese Prime Minister Shinzo Abe that he’s confident of winning the support of the Left parties and hopes Japan will support India during international negotiations.
“We haven’t come any closer to an agreement with the government on the nuclear issue,” said Abani Roy, leader of the Revolutionary Socialist Party (RSP), one of the four Left parties that enables Singh’s Congress party to be a majority in Parliament.
In related news, India’s bonds fell on speculation about the Union government’s stability and longevity. The securities snapped a three-day rally.
“Bonds have fallen along with other markets on political uncertainty,” said Manoj Swain, head of fixed-income trading in Mumbai at Standard Chartered Bank Plc.
Monthly inflows of direct investment averaged $1.19 billion (Rs5,260 crore) in the first four months of this year, compared with $628 million in the same period in 2006 .
The inflows increased to $1.55 billion in April from $603 million in the previous month.