Indian Rupee's `Unprecedented' Decline Not Over, Treasurers Say

By Sam Nagarajan and Anoop Agrawal

Sept. 30 (Bloomberg) -- India's rupee may extend yesterday's drop to a five-year low as the trade deficit swells and overseas investors dump local shares, said treasurers at Larsen & Toubro Ltd., Hero Honda Motors Ltd. and Essar Group.

Dwindling capital inflows, elevated oil prices and slowing economic growth will undermine the rupee, said Yeshwant M. Deosthalee, chief financial officer at Mumbai-based Larsen & Toubro, India's biggest engineering company. A weaker currency may also exacerbate an inflation rate near a 16-year high by increasing import costs, said Ravi Sud, chief financial officer at Hero Honda, the nation's largest motorcycle maker.

``The drop in the rupee is unprecedented and never have I seen such a move in my 28-year career, barring the devaluation in 1991,'' said N.S. Paramasivam, who trades an average $200 million a day as head of treasury in Mumbai at Essar, which has businesses in shipping, steel and oil. ``The downside risk to the rupee is mostly emanating from lack of dollar supply.''

The rupee has dropped 16 percent this year, heading for its worst annual performance since 1991, when India devalued the currency as a balance-of-payments crisis forced it to pawn gold from its reserves. Exporters and importers alike are struggling to cope with as the exchange rate has swung between a decade- high and a 26-month low within a year.

Price Swings

The rupee touched 47.115 a dollar yesterday, the lowest level since June 3, 2003, after reaching 39.185 on Nov. 7 last year, its strongest since February 1998. Essar's Paramasivam predicts the currency, which was at 46.955 late yesterday in Mumbai, will trade between 45 and 47.50 over the next six months.

India's current-account deficit may widen by $12 billion in the financial year ending March 31, 2009, after reaching a record $17.7 billion the previous year, he said. Imports exceeded exports by $10.8 billion in July, the most ever.

Implied volatility on one-month dollar-rupee options reached 17.25 percent on Sept. 19, the highest in at least nine years, after credit-market losses led to the collapse of Lehman Brothers Holdings Inc. and U.S. government takeovers of Fannie Mae, Freddie Mac and American International Group Inc.

``The magnitude and timing of the crisis has taken everyone by surprise,'' said Deosthalee. ``Such sharp depreciation is not desirable. It's been very challenging for us'' to manage risks related to the rupee's fluctuations.

Larsen's dollar borrowing costs may climb by as much as 1.5 percentage points this fiscal year as credit-market turmoil makes banks less willing to lend, he said. The company has $800 million of overseas debt and the increase would boost financing costs by $15,000 a year for every $1 million of new loans taken out.

Selling Shares

Overseas investors sold $9.2 billion more Indian shares than they bought this year, following a record $17.2 billion of net purchases in 2007, according to data provided by the Securities & Exchange Board of India.

The currency ``isn't likely to turn around at least for six months,'' said Prabal Banerji, Mumbai-based chief financial officer at Hinduja Group, which has businesses in banking, automobiles and entertainment. ``Inflation will stay elevated as oil will stay around $100 a barrel.''

India imports almost three-quarters of the oil it needs. The front-month crude futures contract was recently at $96.11 a barrel in New York, 6 percent higher than the seven-month low of $90.51 reached on Sept. 16. The price touched a record $147.27 on July 11.

The Reserve Bank of India will stem rupee losses and may halt the currency's slide at about 47 per dollar, according to Larsen's Deosthalee and Essar's Paramasivam. A steeper drop would draw speculators, possibly causing the rupee to spiral down into a ``bottomless pit,'' Paramasivam said.

A surge in commodity prices this year propelled India's wholesale-price inflation to 12.63 percent in August, the fastest since June 1992.

Central Bank Reserves

``A weaker rupee is the last thing the central bank wants at a time when inflation is in double digits,'' Sud said.

India's foreign-currency reserves were $282.8 billion as of Sept. 19, down from a record $316.2 billion four months earlier, central bank figures show. The drop indicates policy makers sold dollars to bolster the rupee.

The rupee may ``limp back'' to 43 a dollar in six months or more should global investors' risk appetite improve, Hinduja's Banerji said.

The risk of a recession in the U.S., Europe and Japan may slow growth in India, adding pressure on the rupee to weaken, according to Hinduja's Banerji, Larsen's Deosthalee and Hero Honda's Sud. The central bank predicts the $1.2 trillion economy will expand 8 percent in the 12 months through March 31, the slowest pace in six years.

Domestic Demand

Domestic demand in the world's second-most populous country will help temper the rupee's losses, said S.K. Joshi, Director of Finance at Bharat Petroleum Corp., the nation's second- biggest state-run refiner. Exports account for about 30 percent of India's gross domestic product.

``India still is a domestic-demand driven economy,'' he said. ``That will soothe sentiment sooner or later.''

To contact the reporters on this story: Sam Nagarajan in New Delhi at snagarajan@bloomberg.net; Anoop Agrawal in Mumbai at aagrawal8@bloomberg.net.