Indian Rupee May Slump to 50 per Dollar on Crisis, Calyon Says

By Anil Varma

Oct. 20 (Bloomberg) -- India's rupee, Asia's third-worst performing currency this year, will fall to a record low of 50 per dollar by year-end as the global credit crisis spurs investors to sell emerging-market assets, Calyon said.

The currency, headed for its biggest annual loss in 17 years, is one of the most vulnerable in the region to the falling appetite for risky investments, said Sebastien Barbe, a strategist in Hong Kong at Calyon, the investment banking unit of France's Credit Agricole SA. Overseas funds sold a record $11.2 billion in Indian shares this year, according to stock exchange data.

``The risk is still for more losses in the rupee,'' Barbe said in a telephone interview. ``It'll remain among the most vulnerable in Asia to risk aversion in the next six months because India is one of the two economies, along with Korea, which still has a lot of hot money that can leave anytime.''

The rupee has fallen 19.4 percent this year, the most since a balance-of-payments crisis in 1991 forced the nation to pawn its gold with the International Monetary Fund to pay for imports. It is headed for the first annual loss since 2005 as overseas investors pulled out nearly two-thirds of the $17.4 billion they invested in Indian stocks last year, according to data from the stock exchange.

The currency has fallen for 10 weeks, the longest losing streak since December 2005, to close at a six-year low of 48.8825 on Oct. 17, according to data compiled by Bloomberg. It fell to a record low of 49.26 in intraday trading on Oct. 10.

`Fragile Markets'

Implied volatility on one-month dollar-rupee options was at 24 percent Oct. 17, Bloomberg data show. The gauge of expected swings in the rupee, quoted by traders as part of pricing options, rose to 30 percent on Oct. 10, the most in at least nine years.

``A lot of banks in the U.S. and Europe need money to fill holes in their balance sheets and they are pulling money out of the most fragile markets, and India is one of them,'' Barbe said. ``India has welcomed a lot of external financing, portfolio flows and bank credit, in recent years.''

The Bombay Stock Exchange's Sensitive Index closed below 10,000 on Oct. 17 for the first time since June 2006. The index lost 51 percent this year, the most since it was formed in 1986.

`More Exposed'

The rupee, which Calyon forecasts to be among the worst- performing Asian currencies in the next six months, may fare better than its regional peers later next year, Barbe said.

``India is more exposed to the ongoing financial-sector stress but it may be hurt less by the global recession that will follow the credit crisis,'' he said. ``India's exports-to-GDP ratio is relatively low, which means its economy will suffer less amid a downturn in global demand.''

The rupee's losses may also be limited as the central bank sells its dollar reserves to curb the currency's volatility, Barbe said.

The Reserve Bank of India's foreign-exchange reserves fell more than $32 billion this year, indicating the bank sold the U.S. currency. Reserves declined a record $9.9 billion in the week ended Oct. 10.

``I would short the rupee versus the rest of Asia, with the exception of Korea, for the next six months and do just the reverse over the following six months, Barbe said.

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