Bloomberg News

India’s Rupee Falls, Erases Gains on Concern Over Europe Crisis

November 23, 2011

Nov. 23 (Bloomberg) -- India’s rupee fell, erasing earlier gains, on concern European policy makers will be unable to contain the region’s debt crisis, hurting demand for emerging- market assets.

The currency fell for the eighth day after Germany missed its maximum sales target at a bund auction by 35 percent. The rupee had earlier rebounded from a record low on speculation the central bank sold dollars, according to J. Moses Harding, an executive vice president at IndusInd Bank Ltd. The Reserve Bank of India today eased rules for currency swaps to boost the supply of dollars in the financial system.

“The situation in Europe is the main driver of emerging- market currencies,” Mumbai-based Harding said. “Unless there is a credible solution to the debt problems, domestic policy will be largely ineffective.”

The rupee declined 0.1 percent to 52.3750 per dollar in Mumbai, after earlier rising as much as 1.1 percent, according to data compiled by Bloomberg. It touched an all-time low of 52.73 yesterday.

The Reserve Bank “can and will intervene” in the foreign- exchange market when it is consistent with its policy of ensuring that exchange-rate volatility doesn’t impair macroeconomic stability, Governor Duvvuri Subbarao told reporters in the southern city of Hyderabad yesterday. He said he can’t confirm if the central bank intervened.

Dollar Squeeze

The RBI removed a $100 million limit on net foreign- exchange supply into the local market via currency swaps, according to a statement on the central bank’s website today. The decision will allow companies with overseas income to sell more dollars in the local market, according to Standard Chartered Plc.

“This is a move to free up limits so that corporates can sell dollars,” said Priyanka Kishore, a Mumbai-based currency strategist at Standard Chartered. “Banks had already reached the limits for some corporates and so their orders to sell the dollar couldn’t be executed.”

The rupee has lost more than 14 percent this year, the worst performance among Asian currencies, and is headed for the biggest decline since 2008. Implied volatility on one-month dollar-rupee options, a gauge of expected fluctuations, jumped 210 basis points this quarter to 13.6 percent, based on data compiled by Bloomberg.

“The RBI has been intervening to some extent but nothing huge,” Patrick Perret-Green, Singapore-based head of foreign- exchange and rates at Citigroup Inc., said in an interview on Bloomberg TV today. “But given the speed and scale of the move, they will come in.”

‘Limited’ Ability

The central bank’s ability to intervene is “limited,” R. Gopalan, secretary of economic affairs at the finance ministry, said this week. IndusInd’s Harding said this means the RBI is unlikely to sell dollars “aggressively” as this could further tighten rupee liquidity. Banks borrowed 1.32 trillion rupees ($25 billion) yesterday from the monetary authority’s overnight facility, the most since March, according to data from the central bank.

“The RBI can’t afford to intervene as India’s foreign exchange reserves are not very huge,” D.S. Rawat, secretary general of the Associated Chambers of Commerce and Industry of India, wrote in an e-mail on Nov. 21.

India’s foreign exchange reserves stood at $314.3 billion as of Nov. 11, central bank data show, while total external debt was $317 billion at the end of June.

Widening Deficit

The rupee is being punished for India’s current-account shortfall, which is receiving heightened attention due to the concern about the U.S. deficit and European debt, said Nick Verdi, a currency analyst at Barclays Capital.

The current account, the broadest measure of trade, recorded a deficit of $14.1 billion in the three months through June, compared with a shortfall of $5.4 billion the previous quarter, according to central bank data. Offshore investors pulled $1.8 billion from local equities since foreign holdings reached a record $104.4 billion in July, according to data from the market regulator.

“India’s current-account deficit and a relative lack of capital inflows has really raised the currency’s sensitivity to sudden changes in risk sentiment,” Singapore-based Verdi said in an interview yesterday. “The rupee will stay an underperformer in Asia for the foreseeable future.”

The central bank in October said the deficit could widen if oil prices continue to push up the import bill.

Inflation, Growth

The higher rupee-cost of oil will also boost inflation, which has stayed above 9 percent for 11 straight months, according to Sailesh K. Jha, head of Asia market strategy in Singapore at Skandinaviska Enskilda Banken AB. He predicts wholesale prices will rise 10.2 percent in November, after climbing 9.73 percent last month.

“The long-term negative impact of inflation, the lagged impact of higher interest rates and policy stalemate are likely to result in below trend growth,” Deepali Bhargava, chief economist at Espirito Santo Securities in Mumbai, wrote in a report published today. She predicts the economy will expand 7.2 percent in the year to March 2012, lower than the central bank’s forecast of 7.6 percent.

Three-month offshore forwards traded at 53.42 to the dollar, compared with 53.46 yesterday. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.

The rupee is expected to reverse its losses once the European crisis is resolved, the RBI’s Subbarao said yesterday. “Clearly, to what extent it moves and in which direction will depend on credible resolution of external situation, particularly the sovereign-debt problem in Europe.”

--Editors: Sandy Hendry, Ven Ram

To contact the reporters 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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