Indian Rupee Falls to 5 1/2-Year Low on Capital-Outflow Concern

By Anil Varma

Oct. 8 (Bloomberg) -- India's rupee fell to the lowest level in 5 1/2 years on speculation a global stocks slide will encourage investors to take more money out of the nation.

The currency dropped for a fourth day, joining declines in eight of Asia's 10 most-active currencies. India's benchmark share index fell 3.1 percent and Japan's Nikkei 225 Stock Average lost 9.4 percent following a slump in U.S. equities.

``The rupee market is concerned over the large amount of foreign investments that are being pulled out from India as well as elsewhere,'' said Nizam Idris, a foreign-exchange strategist at UBS AG in Singapore. ``Sentiment across currency markets is soured by extreme risk aversion.''

The rupee fell 0.2 percent to 48.00 versus the dollar as of the 5 p.m. close in Mumbai, according to data compiled by Bloomberg, the weakest level since January 2003. The currency fell as low as 48.81 in intraday trading. The rupee may decline to 49 this year and 50 by the end of March, Idris said. The all- time low for the rupee is 49.07, reached in June 2002.

The Bombay Stock Exchange's Sensitive Index has fallen more than 44 percent this year, wiping out all of 2007's gains. Funds based abroad sold $9.8 billion more Indian shares than they bought this year, according to the Securities and Exchange Board of India.

Implied volatility on one-month dollar-rupee options rose to 24.3 percent today, the highest in at least nine years, Bloomberg data show. Traders quote implied volatility, a gauge of expected swings in exchange rates, as part of option prices.


`External Debt'

The rupee also fell on concern India's rising overseas debt will add pressure to its balance of payments amid a global financial crisis.

``The rupee market is also concerned about India's high external debt level,'' UBS's Idris said.

India's outstanding overseas debt increased 22.8 percent in the year through June to a record $221.3 billion, the central bank said on Sept. 30.

The government may allow more overseas investments in corporate and government bonds and ease overseas borrowing rules for local companies to boost dollar inflows.

The finance ministry is considering a proposal to raise the limit on holdings of government bonds by overseas investors from $5 billion and that on corporate bonds from $3 billion, said an official who did not want to be named.

The rupee pared losses after the U.S. Federal Reserve, European Central Bank and four other central banks lowered interest rates in a coordinated emergency effort to ease the economic effects of the global financial crisis.

The Fed, ECB, Bank of England, Bank of Canada and Sweden's Riksbank each cut their benchmark rates by half a percentage point. The Bank of Japan, which didn't participate in the move, said it supported the action. Switzerland also took part. Separately, China's central bank lowered its key one-year lending rate by 0.27 percentage point.

To contact the reporters on this story: Anil Varma in Mumbai at avarma3@bloomberg.net.