As rupee falls to 8-1/2 month low, more weakness in store

Last Updated: Thu, May 23, 2013 12:45 hrs

The rupee slid to its lowest in over 8-1/2 months on Thursday, heading for a fifth consecutive session of falls, as worries about a potential pullback in the U.S. monetary stimulus programme sparked a shift sway from riskier currencies.

Any pullback on U.S. quantitative easing has the potential to hit Indian markets hard. Foreign investors have bought more than $5 billion of debt and stocks this month, marking a surge in inflows from previous months.

The Reserve Bank of India (RBI) was not seen intervening to bolster the rupee, traders said. The RBI instead bought dollars for a net total of $820 million in March, with talk of subsequent purchases in April.

Despite foreign inflows, the rupee has lost some 3.7 percent this month, after a surge in gold imports led to a surprisingly wide trade deficit in April, sparking concerns about India's current account deficit.

Some analysts have expressed surprise at the pace of the rupee's fall, and expect the domestic currency to remain under pressure given the dollar rally and the economic concerns at home, especially after Standard & Poor's reiterated its "negative" outlook on India this month.

Moses Harding, head of asset-liability management at IndusInd Bank, cited the lack of optimism about the economy, along with "general dollar strength against global currencies and political uncertainties and limited bandwidth for reforms ahead of elections" as the key factors hurting the rupee.

He expects the rupee weakness to further extend into the 56.02-56.43 zone.

The rupee has "struggled in a more acute manner than we have thought it should have done," HSBC said in a note on Thursday.

The currency breached the key psychological level of 56 to fall as low as 56.01 per dollar on Thursday, a level last seen September 6, 2012. At 12.25 p.m., the rupee was at 55.87/88 versus its close at 55.46/47 on Wednesday.

The falls came as the dollar bounded up to a three-year high against a basket of major currencies in Asia on Thursday, boosted by the prospect that the U.S. Federal Reserve might scale back its stimulus programme this year.

Indian shares were also lower, with the benchmark BSE Sensex down 1.5 percent.

More from Sify: