By Anoop Agrawal
Oct. 23 (Bloomberg) -- India's rupee weakened to a record low against the dollar as stocks slumped, heightening concern overseas funds will sell more local equities.
The currency fell for a seventh day on speculation the government's decision to raise the limit on loans Indian companies can get from abroad will fail to increase the supply of foreign exchange in the local market, said Sanjay Arya, a treasurer at state-owned Bank of Maharashtra. The central bank yesterday eased the overseas borrowing rules for domestic firms, lifting curbs imposed last year. The announcement was made after the financial markets closed.
``The global credit environment is still that of pessimism and the availability of funds is still difficult, which is why we should not expect easier overseas borrowing rules will result in dollar supply any time soon,'' Mumbai-based Arya said.
The rupee slid 1.1 percent to 49.825 per dollar at the 5 p.m. close in Mumbai, according to data compiled by Bloomberg. It may drop to 50 in coming days, Arya said.
The Reserve Bank of India said local companies can borrow up to $500 million in a financial year without prior approval and can repatriate the funds as long as they don't invest the money in capital markets or real estate. It also raised the cap on borrowing costs. Last year, the government told companies they couldn't repatriate more than $20 million.
Share Sales
Sales of Indian shares by overseas investors this year exceeded purchases by a record $12.1 billion as the benchmark Bombay Stock Exchange Sensitive Index, or Sensex, slid 52 percent. The measure fell 3.9 percent today.
``Nobody allows'' the rupee, ``to fall, nobody allows it to rise,'' Finance Minister Palaniappan Chidambaram told reporters today. ``The rupee rises, falls depending upon the demand for foreign exchange.''
Growth in Asia's third-largest economy may slow more than previously estimated, the central bank said in a report today, a day before Governor Duvvuri Subbarao meets fellow policy makers to review the monetary policy. He unexpectedly cut the key repurchase rate by 100 basis points to 8 percent on Oct. 20.
The economy may expand 7.7 percent in the year ending March 31, the central bank said, citing the median estimate given by 13 research groups in September. That's less than the 7.9 percent estimate in June.
The rupee pared losses on speculation the central bank will buy its currency to prevent imports from becoming more expensive.
Intervention
``The central bank will intervene to remove the speculative elements by supporting the rupee,'' said K.V. Mallik, treasurer at state-owned UCO Bank in Kolkata.
Reserve Bank of India spokeswoman Alpana Killawala said the central bank doesn't comment on daily rupee movements. Central banks intervene in currency markets by arranging sales or purchases of foreign exchange.
A weaker currency increases costs for companies such as Indian Oil Corp Ltd., the nation's largest refiner. These companies face losses because under Indian rules they have to sell fuel products at prices below their costs. India meets almost 75 percent of its crude oil needs from imports.
The nation's foreign-exchange reserves fell to $274 billion on Oct. 10, from a record high of $316 billion in May, indicating the central bank has sold the U.S. currency. The reserves declined $9.9 billion in the week ended Oct. 10, the biggest drop since Bloomberg started compiling the data in 2000.
Many Parameters
Volatility in the rupee may decrease in the coming days, Ashok Chawla, economic affairs secretary said today.
``The movement of the rupee is something which is based on a large number of parameters,'' Chawla told reporters in New Delhi today. ``Once there is some easing of pressure, the expectation is it will be less volatile.''
Implied volatility on one-month dollar-rupee options rose to 24 percent from 14.5 percent a month ago, Bloomberg data show. Traders quote the gauge of expected swings in the rupee as part of pricing options.
There is no fixed target for the rupee, Chawla said.
``We are monitoring the situation and the Reserve Bank is doing its job,'' Chawla said. ``In any case, the interventions are not specifically to reach any specific target.''
To contact the reporter on this story: Anoop Agrawal in Mumbai at aagrawal8@bloomberg.net.
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