Wednesday, October 22, 2008

Indian Rupee Closes at Record Low as Global Funds Sell Stocks

By Anoop Agrawal

Oct. 22 (Bloomberg) -- India's rupee fell to an all-time low against the dollar as a decline in stocks prompted investors to sell the nation's assets.

The currency dropped for a sixth day after the Dow Jones Industrial Average slid 2.5 percent yesterday and Japan's Nikkei 225 Stock Average lost 6.8 percent today. Sales of local equities by global funds have exceeded purchases this year by a record $12.1 billion. India's benchmark Bombay Stock Exchange Sensitive Index snapped a two-day advance, extending this year's losses to almost 50 percent.

``The volatility in equity markets is suggesting global investors are not convinced of stability anytime soon, which is why emerging markets are probably suffering,'' said Sudarshan Bhatt, chief currency trader at state-owned Corporation Bank in Mumbai. ``Since India is not a preferred destination for investments the rupee will also suffer.''

The rupee slid as much as 0.8 percent to 49.50 a dollar, an all-time low, before closing at a record low of 49.285 at 5 p.m. in Mumbai, according to data compiled by Bloomberg.

Overseas investors were net sellers of Indian stocks on all 12 trading days of this month through Oct. 20, dumping $2.9 billion, compared with $1.97 billion in September, Securities & Exchange Board of India said on its Web site.

The currency has declined 20 percent this year, the worst performer in Asia after South Korea's won. It may fall to 52 per dollar by year-end on speculation the central bank will add to cuts in the benchmark interest rate, reducing demand for the nation's assets, according to Barclays Bank Plc.

No Attraction

The currency will weaken as Reserve Bank of India Governor Duvvuri Subbarao may reduce the repurchase rate for a second time this week on Oct. 24 by as much as 0.5 percentage point to 7.5 percent, according to Peter Redward, head of research for emerging Asia at the U.K.'s second-biggest bank.

``The central bank's moves are predominantly focused on liquidity management and financial markets stability,'' Singapore-based Redward said in a telephone interview this week. ``That will still not be an attraction for overseas investors which is why we think the rupee will weaken further.''

India's central bank on Oct. 20 unexpectedly lowered the repurchase rate for the first time since 2004 by 1 percentage point to 8 percent. It reduced the reserve requirement for banks three times in October to prevent global credit-market turmoil from curbing growth in Asia's third-largest economy.

After the cut in India's borrowing costs this week, the rate advantage for a global investor over the U.S. narrowed to 6.5 percentage points from 7.5 percentage points. The gap in comparison to Malaysia shrank to 4.5 percentage points from 5.5 points and with Thailand to 4.25 percentage points from 5.25 points.

Central Bank

The rupee pared losses on speculation the central bank will intervene as further declines will make imports more expensive.

``At present, it is only the central bank that is capable of halting the rupee's declines,'' said V. Kumar, chief currency trader at State Bank of Travancore in Mumbai. ``They will probably intervene to curb any volatility if not change direction for the rupee.''

Reserve Bank of India spokeswoman Alpana Killawala said the central bank doesn't comment on daily rupee movements. Central banks intervene in currency markets by arranging sales or purchases of foreign exchange.

A weaker currency boosts costs for Indian refiners who buy three-quarters of the annual crude oil they need overseas. These companies are facing losses because of restrictions on their selling prices.

India's foreign-exchange reserves have dropped by about $42 billion to $274 billion as on Oct. 10, from a record high of $316 billion in May, indicating the central bank has sold the U.S. currency.

The foreign-exchange reserves fell by $9.9 billion in the week ended Oct. 10, the biggest decline at least since Bloomberg started compiling the data in 2000.

To contact the reporter on this story:
Anoop Agrawal in Mumbai at
aagrawal8@bloomberg.net

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