India Central Bank May Cap Rupee Drop, Former Panel Member Says

By Anoop Agrawal

Sept. 25 (Bloomberg) -- India may cap rupee losses at between 46 and 47 a dollar as further declines will strain finances of state-owned refiners reeling from a rebound in oil prices, according to a former member of a central bank panel.

A drop in the rupee will increase import costs for oil companies that are facing as much as $35 billion in losses this year for selling fuels below cost. The Reserve Bank of India will intervene to support the currency as global financial turmoil spurs capital outflows, said A.V. Rajwade, one of the six members of the 2006 central bank committee that recommended steps to make the rupee fully convertible by 2011.

``There's a greater probability of a rupee drop because the current account will be pretty awful,'' he said in an interview in Mumbai yesterday. ``The central bank will probably put a floor because the oil companies' finances are stretched.''

The rupee slumped to a two-year low last week and implied volatility on one-month dollar-rupee options rose to the highest in at least nine years as Lehman Brothers Holdings Inc.'s bankruptcy drove global funds to safer assets. The currency traded at 45.955 a dollar yesterday in Mumbai. It touched 46.975 on Sept. 16, the lowest level since July 24, 2006.

Overseas investors have sold $8.8 billion more Indian shares than they bought this year, causing a 14.2 percent slide in the rupee that was the second-worst performance among the 10 most-active Asian currencies excluding the yen.

The current-account deficit, the shortfall in trade and investment flows, widened to a record $17.4 billion in the financial year ended March 31, from $9.8 billion the previous year, central bank data show.

Oil Subsidies

Oil subsidies have climbed to $42.5 billion even as India raised fuel prices twice this year, according to the central bank. Indian Oil Corp., the country's biggest refiner, reported a 72 percent drop in profit in the quarter ended June 30, while smaller rivals Bharat Petroleum Corp. and Hindustan Petroleum Corp. reported losses. Crude oil in New York has risen almost 19 percent from a seven-month low touched on Sept. 16.

``Oil companies are finding it extremely difficult to finance even their working capital,'' Rajwade said. Central bank intervention policy will ``keep in mind their finances.''

The rupee has risen 2.2 percent from its low reached last week on speculation the central bank sold dollars and after the U.S. government proposed a $700 billion bailout package for its troubled banks and financial firms.

India's foreign-currency reserves stood at a seven-month low of $280.3 billion as of Sept. 12, according to central bank data, after dropping from a record $306.2 billion in May. The depletion indicates it sold dollars to support the rupee.

Enough Ammunition

``They won't lack ammunition,'' Rajwade said. Central banks intervene in currency markets by arranging sales of purchases of foreign exchange.

The Reserve Bank of India said on Sept. 16 it would augment supply of dollars in the domestic market, and raised interest rates on some foreign-currency deposits to attract more inflows.

The central bank may refrain from raising rupee interest rates because the government would pay a political price with elections due in seven months, Rajwade said.

Social disorder may discourage overseas funds from putting money into India, he said. A chief executive of a local unit of an Italian company was bludgeoned to death this week near New Delhi by workers who were fired by the factory.

Rupee ``volatility is rising,'' Rajwade said. ``I am advising my clients to pay a fee and buy options'' to hedge their risks.

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