Bloomberg News

Rupee Tumbles 16% in First Annual Loss Since 2008; Bonds Decline

January 01, 2012

Dec. 30 (Bloomberg) -- India’s rupee completed its first annual loss since 2008 as Europe’s debt crisis threatened to derail global economic growth and hurt demand for financial assets in developing nations.

The currency weakened the most in Asia this year, touching a record low of 54.305 per dollar on Dec. 15, as foreign funds cut holdings of Indian stocks by $380 million, exchange data show. The $1.7 trillion economy may miss the central bank’s growth estimate of 7.6 percent for the 12 months ending March 31, Governor Duvvuri Subbarao said Dec. 22. Sovereign bonds completed a third annual decline on speculation the government will boost its debt-sale plan from a record.

“It was a bad year for the rupee and the first half of 2012 could be tough as well,” said Roy Paul, deputy general manager of treasury at Federal Bank Ltd. in Mumbai. “The problems in Europe are likely to persist.”

The rupee slid 15.8 percent in 2011 and 0.2 percent this week to 53.0650 per dollar in Mumbai, according to data compiled by Bloomberg. It was little changed today. The currency may slide to 60 per dollar next year, CLSA Asia-Pacific Markets and Skandinaviska Enskilda Banken AB predicted this month.

India’s currency also underperformed those of the largest emerging markets this year. Brazil’s real lost 11 percent to 1.8657 per dollar and the Russian ruble fell 5.4 percent to 32.2669. The Chinese yuan appreciated 4.7 percent to 6.2940.

Central Bank Intervention

The Reserve Bank of India intervened in the foreign- exchange market yesterday and sold dollars after the rupee fell to 53.50, according to three traders at state-owned banks, who declined to be identified because they aren’t authorized to speak to the media on central bank action. The central bank “doesn’t comment on day-to-day market movements,” spokeswoman Alpana Killawala said.

The monetary authority announced measures this quarter to curb speculation and volatility in the rupee market. Local companies can’t enter into multiple forward contracts to cover a single overseas transaction, it said this month. The bank eased rules in November for firms to borrow offshore and sell foreign currencies through swaps, and allowed lenders to offer higher deposit rates for Indians living outside the country.

“These are not the only measures we have,” RBI Deputy Governor Subir Gokarn told reporters in Mumbai last week. “There are other measures we can undertake to bring stability to this market.”

Three-month offshore forwards were at 54.53 to the dollar, compared with 54.81 yesterday. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars. The BSE India Sensitive Index of shares lost 25 percent in 2011.

Bonds Decline

Benchmark sovereign bonds fell on speculation the economic slowdown will cut the government’s revenue and force it to sell more debt than planned. Finance Minister Pranab Mukherjee expanded the annual borrowing program by 13 percent in September to a record 4.7 trillion rupees ($88.4 billion).

India may raise that target again, a finance ministry official, who declined to be identified ahead of a public announcement, said yesterday.

“I would expect additional borrowing of about 400 billion rupees,” said N.S. Venkatesh, head of treasury at Mumbai-based IDBI Bank Ltd. “The government cannot afford to cut spending as this would stall economic growth.”

The yield on 10-year sovereign bonds rose 65 basis points, or 0.65 percentage point, this year, according to data compiled by Bloomberg. That’s the biggest increase in such rates after Vietnam in Asia. The rate on the 8.79 percent note due November 2021 climbed two basis points today and 20 this week to 8.57 percent, according to the central bank’s trading system.

Wider Spreads

The extra yield sought on the notes over similar maturity U.S. Treasuries surged 205 basis points in 2011 to 667 basis points. The spread reached a 12-year high of 697 basis points in November.

Rupee-denominated notes returned 5.9 percent this year compared with the region’s best performance of 22 percent for Indonesian securities, HSBC Holdings Plc indexes show. Overseas investors raised holdings of Indian debt by $8.5 billion this year to a record $26.3 billion on Dec. 23, exchange data show.

“Government borrowing is pressuring the yields upward,” Federal Bank’s Paul said. “But the slowing economy will force an interest-rate cut next year and so yields should move downward in 2012.”

--Editors: Anil Varma, Simon Harvey

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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