Rupee continues to fall as investors flee emerging markets

Rupee continues to fall as investors flee emerging markets

Mumbai: The rupee declined on Monday on signs that investors are taking money out of emerging markets as financial institutions worldwide face mounting credit market losses.

The currency extended two weeks of losses after data from the capital market regulator, Securities and Exchange Board of India (Sebi), showed overseas investors extended record sales of local equities.

Eight of the 10 most active currencies in Asia outside Japan fell on Monday as Asian stock indices dropped on speculation that demand for the region’s assets and exports is falling amid a deepening global economic slump.

“The rupee will face some more uncertainty and volatility in the short term," said K.V. Mallik, treasurer at state-owned UCO Bank Ltd, in Kolkata. “Outflows from the equity market and import-related payments will keep some pressure on the rupee."

The rupee weakened 0.1% to 50.10 a dollar as of the 5pm close in Mumbai, according to data compiled by Bloomberg. It had touched an all-time low of 50.59 in intra-day trading on 20 November. The currency has lost 21.3% this year, the most since 1991.

Implied volatility on one-month dollar-rupee options rose on Monday to 26%, near the highest this month. Traders quote implied volatility, a gauge of expected swings in exchange rates, as part of pricing options.

The Bombay Stock Exchange’s benchmark index, the Sensex, lost 0.1% on Monday. The MSCI Asia-Pacific Index declined 0.6%.

Investors based abroad pulled a record $4.27 billion (nearly Rs21,400 crore today) out of India’s equity and debt markets last month as the credit crisis escalated following the collapse of Lehman Brothers Holdings Inc. in September. They sold $13.4 billion of shares this year, data provided by Sebi shows.

The rupee’s losses were curbed by speculation that the Reserve Bank of India (RBI) seeks to limit declines that may stoke inflation. RBI’s foreign exchange reserves have fallen by almost $65 billion from a record $316.2 billion reached in May, indicating it has been selling dollars.

India’s inflation eased to 8.9%, the slowest in five months, in the first week of this month, the government had said on 20 November. Currency losses increase the cost of imported goods.

Offshore forward contracts showed bets for how far the rupee will weaken in the next month, were little changed.

Non-deliverable contracts showed an implied rate of Rs50.95 to the dollar, versus Rs51.05 on 21 November.

Forwards are agreements in which assets are bought and sold at current prices for future delivery. Indian rupee forwards traded overseas?are non-deliverable, meaning they are settled in dollars rather than the local currency.