Indian Rupee to Drop to Record of 52 on Rate Cut, Barclays Says

By Anoop Agrawal

Oct. 22 (Bloomberg) -- India's rupee will fall to a record low against the dollar by year-end on speculation the central bank will add to cuts in the benchmark interest rate, reducing demand for the nation's assets, according to Barclays Bank Plc.

The currency will weaken by about 6 percent to an all-time low of 52, said Peter Redward, head of research for emerging Asia at the U.K.'s second-biggest bank. Reserve Bank of India Governor Duvvuri Subbarao will reduce the repurchase rate for a second time this week on Oct. 24 by as much as 0.5 percentage point to 7.5 percent, according to Redward.

India's central bank on Oct. 20 unexpectedly lowered the repurchase rate for the first time since 2004 by 1 percentage point to 8 percent. It reduced the reserve requirement for banks three times in October to prevent global credit-market turmoil from curbing growth in Asia's third-largest economy. The rupee declined to a record low on Oct. 10 of 49.26.

``The central bank's moves are predominantly focused on liquidity management and financial markets stability,'' Singapore-based Redward said in a telephone interview this week. ``That will still not be an attraction for overseas investors which is why we think the rupee will weaken further.''

The rupee closed at 48.9950 per dollar yesterday in Mumbai, according to data compiled by Bloomberg. The currency has dropped almost 20 percent this year, the second-worst performance in Asia after South Korea's won.

Current-Account Deficit

India's currency will also weaken on speculation the current-account deficit will widen, Redward said.

A shortfall in the current account, the broadest measure of trade, signals more money is flowing out of the nation than is coming in.

``The current-account situation is worrisome and will keep the bias in favor of the dollar,'' according to Redward.

India's central bank reduced the so-called cash reserve ratio by 2.5 percentage points to 6.5 percent since Oct. 11 freeing up 1 trillion rupees ($20.4 billion) with banks. It will bring the measure to as low as 4.5 percent by March, Barclays forecast.

After the cut in India's borrowing costs on Oct. 20, the rate advantage for a global investor over the U.S. narrowed to 6.5 percentage points from 7.5 percentage points. The gap in comparison to Malaysia shrank to 4.5 percentage points from 5.5 points and with Thailand to 4.25 percentage points from 5.25 points.

The rupee in 2008 erased its 12.3 percent gain of last year after international funds sold a record $11.9 billion of stocks, according to the stock market regulator.

India's current account shortfall, the amount by which imports exceed exports, remittances and other income from abroad, increased to $10.7 billion in the three months to June 30 from a $1.04 billion gap in the previous quarter, the Reserve Bank of India said Sept. 30.

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