Mumbai: The Indian rupee may weaken as global funds start to hit buying limits for the nation’s debt and valuations for equities look expensive, according to HSBC Holdings Plc.

“I won’t be surprised if we drift down to 65-65.25 to the dollar over the next two months," Pradeep Khanna, HSBC’s head of global markets trading for India in Mumbai, said in an interview. “Equity valuations are stretched in India as company earnings haven’t changed much in the past two years while the market is much higher."

While the benchmark S&P BSE Sensex index climbed to a record on Tuesday, foreign investors have turned net sellers of local shares in July for the first time in three months. The withdrawals come as hawkish comments from major central banks cloud the outlook for flows to emerging markets. Overseas purchases of Indian bonds too have stalled this month.

“Clearly, a slowdown is expected over there," Khanna said, noting that global funds, whose access to Indian debt is restricted, have “utilized about 90%" of their investment limits. He also cited a seasonal increase in India’s trade deficit among the reasons for the rupee’s potential depreciation.

The Indian currency capped a fourth straight week of declines on Friday. It rallied 5.2% in the six months ended 30 June, and was at 64.5925 per dollar in Mumbai on Tuesday.

Overseas investors sold a net $269.1 million of Indian stocks this month through 7 July, paring inflows for 2017 to $8.2 billion. Their holdings of rupee-denominated government and corporate bonds are little changed from the end of June, after surging Rs1.2 trillion ($18.6 billion) in the last five months.

The rupee will broadly trade in a range of 64 to 66 per dollar for the rest of the year, Khanna predicts, adding that HSBC remains “constructive" on it from a carry perspective. Borrowing in dollars to purchase rupee assets has earned 7.9% in 2017, the highest carry returns in Asia, data compiled by Bloomberg show. Bloomberg

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