Rupee falls close to 14-month low on stock market losses

Rupee falls close to 14-month low on stock market losses

Mumbai: The rupee fell to near a 14-month low as accelerating inflation spurred overseas funds to reduce local holdings and the country’s benchmark share index extended its five-week slide.

The currency dropped after the Bombay Stock Exchange’s Sensex added to the 3.4% loss on 20 June, the biggest in almost three months.

A government report last week had showed inflation quickened to the fastest since 1995.

Overseas investors sold more Indian shares than they bought on all, but three of the past 23 trading days through 19 June, data from markets regulator Securities and Exchange Board of India (Sebi) showed.

“The rupee is under pressure to weaken because the losses in the stock market are raising concern about capital outflows," said Paresh Nayar, head of foreign exchange and debt trading at Development Credit Bank Ltd in Mumbai. “The currency could fall further if not for support from the central bank."

The rupee dropped 0.1% to 42.97 per dollar at the 5pm close in Mumbai, according to Bloomberg data.

The currency has lost 8.3% this year, following a 12.3% advance in 2007.

Indian stocks have slumped almost 30% this year on concerns that accelerating inflation will erode returns from investments.

Wholesale prices rose 11.05% in the first week of this month from a year earlier.

The central bank, which raised the benchmark interest rate on 11 June by a quarter-percentage point for the first time in 15 months, is acting in a “calm, calibrated manner" to tame inflation that is mostly fuelled by oil prices, governor Yaga Venugopal Reddy said on Monday.

The Reserve Bank of India (RBI) is “confident that a well-managed smooth adjustment of this episode" will rein in prices, he told reporters in Pune.

Funds based abroad sold a net $5.7 billion (Rs24,510 crore today) in Indian equities after purchasing a record $17.2 billion last year, Sebi data showed.

“The market is saying the RBI hasn’t done enough" to curb inflation, said Edwin Gutierrez, who manages $5.5 billion in emerging market debt in London for Aberdeen Asset Management Plc., Scotland’s largest independent money manager. The fund has a “short" position on the rupee, which means that it profits from declines in the currency.

The rupee’s losses were limited by speculation that the central bank bought the currency as it sought to curb the fastest inflation in 13 years.

India’s finance secretary D. Subbarao had said on 21 June that the trend in inflation in the coming months will be influenced by the rupee’s exchange rate.

The comments signalled that the central bank will continue to buy the rupee to limit increases in the cost of imported commodities, said Sonal Varma, a Mumbai-based economist at Lehman Brothers Holdings Inc.

Central banks intervene in currency markets by arranging purchases or sales of foreign exchange.

India’s foreign currency reserves fell by $4.97 billion, the most since December 2005, in the week to 13 June, indicating that the central bank increased dollar sales in the currency market.