By Anil Varma
Feb. 27 (Bloomberg) -- India’s rupee plunged to a record low on concern global funds will step up sales of local assets after Standard & Poor’s said it may cut the nation’s credit rating to junk and economic growth slumped to a five-year low.
The currency tumbled 22 percent versus the dollar in the past 12 months, the third-worst performance among Asia’s 10 most-used currencies. S&P said Feb. 24 the government’s spending plans to shield the country from a global recession were “not sustainable.” The economy expanded 5.3 percent in the fourth quarter, the slowest since 2003, the government reported today.
“The rupee is now under increased pressure following the rating-outlook cut by S&P,” said Krishnamurthy Harihar, treasurer at Development Credit Bank Ltd. in Mumbai. “There’s a decent possibility of an actual rating downgrade in the near future and that’ll fuel more capital outflows.”
The rupee tumbled as much as 1.4 percent to an all-time low of 51.175 per dollar, before closing at 51.150 at 5 p.m. in Mumbai, according to data compiled by Bloomberg. It lost 2.7 percent this week, the most since the five-day period ended Nov. 14, and dropped 4.4 percent this month, the biggest slide since October.
Offshore contracts indicate traders bet the rupee will trade at 51.44 to the dollar in a month, compared with expectations for a rate of 50.67 yesterday. Forwards are agreements in which assets are bought and sold at current prices for future delivery. Non-deliverable contracts are settled in dollars rather than the local currency.
‘Loose Fiscal Policy’
“Continued loose fiscal policy or policy setbacks on monetary, financial, and economic fronts that lower India’s medium-term growth prospects would result in a downgrade,” S&P said in a statement. The company currently rates India’s long- term credit rating at BBB-, the lowest investment grade. Some fund managers are restricted from investing in non-investment grade, or junk, assets.
A deepening global economic slump is eroding the ability of emerging-market economies to raise funds, causing current account and budget deficits to balloon as exports and economies shrink. S&P cut the debt ratings of Latvia and Ukraine this week and said it has negative outlooks for Romania and Bulgaria.
India said this month its budget deficit will more than double to 6 percent of gross domestic product, as it borrows record amounts to finance stimulus measures to revive Asia’s third-largest economy. Government borrowings are set to rise to 3.06 trillion rupees in the year ending March 31, from 1.56 trillion in the previous year.
Stock Sales, Exports
Funds based abroad sold $1.6 billion more Indian equities than they bought this year, adding to 2008’s record $13.3 billion in net sales, according to data released by the Securities and Exchange Board of India. The Bombay Stock Exchange’s Sensitive Index has dropped 7.8 percent this year, following a record 52 percent slide in 2008.
The rupee also fell on concern declining exports will widen the nation’s current-account deficit, increasing demand for dollars to fund the shortfall. A rally in crude oil also added to speculation the current account gap will deepen. India imports almost three-quarters of the oil it uses.
Overseas sales may fall short of the government’s target of $200 billion in the year to March 31, Trade Minister Kamal Nath said yesterday. Exports shrank an average 7.7 percent a month last quarter and imports grew 8.5 percent
“The combination of slowing exports and rising oil prices can add to the rupee’s weakness,” Development Credit’s Harihar said. “The current account will come under pressure.”
Current Account
The deficit in India’s current account, a broad measure of trade flows, remittances and investment income, increased to $12.5 billion in the quarter to Sept. 30, from $9.8 billion in the previous three months, according to the central bank.
Crude oil has gained more than 14 percent this week on the New York Mercantile Exchange, heading for the biggest advance in five weeks.
“All economic parameters indicate that the rupee has to weaken further,” said Puneet Sharma, chief currency trader at state-owned Allahabad Bank in Mumbai. “There appears no reason why investors should buy the local currency.”
The rupee’s losses were limited by speculation the central bank will sell dollars from its reserves to curb currency volatility. The Reserve Bank of India has been intervening in the currency market to smooth rupee movements, causing a decline in the nation’s foreign-exchange reserves, acting Finance Minister Pranab Mukherjee told lawmakers in New Delhi yesterday.
Foreign-exchange reserves dropped to $249.5 billion this month, from a record $316.2 billion reached in May 2008, central bank data show. Central banks intervene by arranging sales or purchases of foreign currency to influence exchange rates.
Implied volatility on one-month dollar-rupee options climbed to 15 percent, the most since Jan. 16, Bloomberg data show. Traders quote implied volatility, a gauge of expected swings in exchange rates, as part of option prices.
To contact the reporters on this story: Anil Varma in Mumbai at avarma3@bloomberg.net
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