Indian Rupee to Fall 7% on Stock Sales, Barclays Says

By Anoop Agrawal

July 22 (Bloomberg) -- India's rupee will fall 7 percent by year-end as overseas investors sell the nation's stocks and a decline in capital inflows widens the current-account deficit, according to Barclays Plc.

The currency will weaken to a 20-month low by Dec. 31 as the broadest measure of trade worsens during the fiscal year ending March 31 due to the decline in investment inflows, said Peter Redward, head of research for emerging Asia at Britain's third-largest bank. Barclays' forecast for the rupee is more bearish than all the 26 respondents in a survey conducted by Bloomberg News.

``We are likely to go through a situation where investors step away from the market,'' Singapore-based Redward said in a telephone interview. ``That will create pockets where the capital inflows don't match the current-account deficit and weaken the currency.''

The rupee fell 0.2 percent to 42.75 per dollar at 11:31 a.m. in Mumbai, having fallen 7.8 percent this year, according to data compiled by Bloomberg. It touched a 15-month low of 43.4750 on July 1. The currency will weaken to 44 by Sept. 30 and 46 by Dec. 31, the lowest since September 2006, Barclays forecast.

India's current-account deficit widened 78 percent in the financial year ended March to a record $17.4 billion, or 1.9 percent of gross domestic product, the central bank said on June 30. The shortfall may increase to 2.75 percent of GDP this fiscal year, Redward said.

`Downside Risk'

``Investors looking at the currency are primarily focused on the dynamics of the balance of payments and the concerns about funding the current-account deficit,'' Redward said. ``Capital inflows are scarce in this environment, which is a downside risk to the rupee.''

Overseas investors have sold $7 billion more Indian shares than they bought this year, after making record net purchases of $17.2 billion in 2007, according to data from the Securities & Exchange Board of India.

Stocks in China and India are ``bargains'' after declines this year dragged down valuations in Asia's two largest emerging markets, Templeton Asset Management Ltd.'s Mark Mobius said.

``We've been rearranging the portfolio based on valuations, which have come down pretty dramatically in places like India and China, where there've been big declines,'' Mobius, who oversees $47 billion of emerging-market equities as executive chairman of Templeton, said in an interview from Toronto.

Budget Deficit

The widening budget deficit is also keeping away overseas investors, Redward said. The shortfall may increase to 4 percent of GDP this fiscal year, from 2.8 percent in the previous 12 months, as the government pays more to subsidize fuel and food, Barclays said.

``We are seeing reassessment of prospects within India and concerns investors are having about the rapidly rising budget deficit,'' Redward said.

The government plans to give oil companies 946 billion rupees ($22.1 billion) of bonds this fiscal year to compensate them for selling fuel below cost. The government does not include the bond issuance in its budget.

Fitch Ratings on July 15 cut India's credit outlook to ``negative'' on concern rising subsidies, interest payments and wages will weaken its finances. The revision was based on ``a considerable deterioration in the central government's fiscal position, combined with a notable increase in government debt issuance,'' James McCormack, Fitch's head of Asia sovereign ratings, said on the same day in a statement.

Long Positions

Investors should hold long positions in the Indian rupee, betting the currency will gain as the central bank raises interest rates to curb inflation, according to UBS AG.

The Reserve Bank of India is likely to increase borrowing costs at its next policy meeting on July 29, adding to two increases in June, Ashley Davies, a currency strategist in Singapore at the world's second-biggest currency trader, wrote today in a note to clients.

Weekly data suggests the RBI began selling its foreign- exchange reserves to support the rupee from the end of May, Davies wrote. The central bank sold $3.5 billion in June and a further $3 billion in the first week of July, Davies said, adding that its reserve balance remains healthy for further dollar selling.

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