Bloomberg News

Rupee Falls Past 50 Per Dollar on Growth Concern; Stocks Slide

October 21, 2011

Oct. 21 (Bloomberg) -- India’s rupee fell past the 50 per dollar level for the first time in more than two years and stocks dropped for a second day on concern the central bank’s fight against inflation will damp economic growth.

The currency and the BSE India Sensitive Index of shares completed the worst week in a month after Finance Minister Pranab Mukherjee said Oct. 19 India’s growth in the year through March may miss estimates. The Reserve Bank of India will boost borrowing costs for a seventh time this year on Oct. 25 to cap prices, according to a Bloomberg survey of economists. Global funds sold a net $72 million in Indian equities this month, exchange data show, on concern Europe’s debt crisis will worsen.

“The growth outlook has weakened and inflation remains stubbornly high,” said Jonathan Cavenagh, a Singapore-based senior currency strategist at Westpac Banking Corp. “European investors invested a lot of capital in Asia when the 2008 financial crisis eased and now there is concern they will pull this back.”

The rupee slid 0.4 percent today and 2 percent this week to 50.0250 per dollar in Mumbai, according to data compiled by Bloomberg. It touched 50.3238 earlier, the lowest level since April 2009. The currency has declined 10.8 percent this year, the worst performance among Asia’s 10 most-traded currencies.

The Sensex fell 151.25, or 0.9 percent, to 16,785.64. The gauge lost 1.7 percent this week. The S&P CNX Nifty Index on the National Stock Exchange of India declined 0.8 percent today to 5,049.95.

Inflation, Rates

The RBI will raise its repurchase rate by a quarter- percentage point to 8.5 percent next week, according to 13 of 19 economists in a Bloomberg survey. Six expect no change. Food inflation in India accelerated to 10.6 percent in the week ended Oct. 8 from a year earlier, the fastest rate since April, government data showed yesterday.

Growth in India’s industrial production has slowed this year as borrowing costs climbed. Factory output gained an average 6.5 percent in the first eight months of 2011, compared with 10.7 percent a year earlier, government data show.

“There is a concern that industrial production is sagging,” Chakravarthy Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, said in New Delhi yesterday. “When inflation remains at a level which is way above what is considered to be acceptable, then the monetary authority has a major responsibility to contain inflation, and that becomes the primary focus of the monetary policy.”

Europe’s debt turmoil has prompted investors to favor the relative safety of the dollar over emerging-market assets. The Sensex has slid 18 percent this year and the Dollar Index, which measures the U.S. currency’s performance against six major trading partners, rose 2.9 percent.

‘Scope for Disappointment’

“There’s some scope for disappointment over the Euro zone plan; we have still got a number of major obstacles to overcome,” Robert John Parker, a senior adviser at Credit Suisse Asset Management, said in an interview with Bloomberg UTV today.

The rupee also dropped as gold and oil importers increased purchases of dollars ahead of public holidays next week, said Kamlakar Rao, head of foreign-exchange trading at state-run Allahabad Bank. Local financial markets are shut on Oct. 26 and 27 for the Diwali festival, when Indians traditionally buy precious metals.

Offshore forwards indicate the rupee will trade at 50.96 to the dollar in three months, compared with expectations for a rate of 50.41 yesterday and 49.69 at the end of last week. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.

Intervention Speculation

The Reserve Bank may intervene in the market to curb the rupee’s losses if it falls past 50.35 a dollar, according to J. Moses Harding, an executive vice president at IndusInd Bank Ltd. in Mumbai. Central banks buy and sell foreign currencies to influence exchange rates.

Investors should buy the rupee once it falls to 50.30 per dollar, targeting a “near-term” advance to 48.60, according to Sailesh K. Jha, Singapore-based head of Asia strategy at Skandinaviska Enskilda Banken AB.

“We expect improvements in risk sentiment in the near-term on the back of our view that European Union policy makers will not disappoint the market significantly and macro data will surprise on the upside in Asia,” Jha wrote.

--Editors: Anil Varma, Sam Nagarajan

To contact the reporter on this story: Jeanette Rodrigues in Mumbai at jrodrigues26@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net.


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