Wednesday May 14, 03:40 PM
Rupee set for more pain; outflows, oil weigh |
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By Saikat Chatterjee
MUMBAI (Reuters) - The rupee is set to fall further from 13-month lows plumbed this week as soaring costs of oil imports boost demand for dollars while capital outflows from the once red-hot stock market also weigh on the currency.
The rupee fell beyond 42.60 per dollar on Wednesday for the first time since mid-April 2007 losing 2.5 percent this week and 7.6 percent since the start of the year and bankers expect it drop past 43 per dollar soon.
"Nobody was expecting the rupee to fall so quickly and most of the exporters have sold their dollars earlier," said Patrick Aranha, head of treasury at Mizuho Corporate Bank in Mumbai.
The rupee hit a near decade-year high at just above 39 to the dollar in November on the back of heavy foreign buying of Indian stocks driven by buoyant growth in Asia's third-largest economy.
But mounting signs the economy was cooling down, including the weakest industrial output reading in six years out this week, dented foreign investors' appetite for Indian assets and they have sold a net $3 billion of stocks since the start of the year.
That is in a stark contrast to last year when foreigners invested a record net $17.4 billion in stocks.
Now the rupee is set for its steepest monthly decline in a decade and is Asia's worst-performing currency this year behind the Pakistani rupee and the Korean won.
HANDS OFF BANK
Economists say with the dollar strengthening and investment and trade flows now working against the rupee, the near-term outlook was bleak.
"These factors are sufficiently strong to promote further weakness at least for the next quarter," Philip Wyatt, economist at UBS, wrote in a report.
Analyst say the central bank also appears reluctant to tap its $312 billion reserves to check the currency's fall the way it acted to stem its rapid rise last year when it jumped 12 percent against the dollar.
Reserve Bank of India Governor Yaga Venugopal Reddy played down the rising trade and current account deficits saying they would be financed "comfortably" by capital inflows.
The central bank has also indicated it did would not seek to use currency gains to help it bring down inflation from its 3-½ year peak of 7.6 percent.
"That was basically a green light to buy the dollar/rupee," said Callum Henderson, head of FX strategy at Standard Chartered Bank in Singapore, adding 42.18 had been a chart support for the rupee and a clear break there would see it head for 43.12.
Singapore's DBS Bank expects the rupee to hit 43.00-43.50 soon unless the stock market recovers and oil prices retreat from their all-time records near $127 per barrel.
Oil refiners are the biggest buyers of dollars in the currency market as India imports nearly 70 percent of oil and the country's trade deficit and oil imports bill shot up by more than a third in 2007/2008 because of soaring world prices.
To make matters worse, exporters who got burned when they sold their dollar receivables at 40.50-41.00 earlier this year in anticipation of rupee gains, were now holding off.
"Exporters are cancelling contracts to sell the dollar because they want to wait for better rates and loan repayments combined with oil dollar buying has precipitated the decline," said Rohan Lasrado, a currency dealer at Mumbai-based HDFC Bank.
Traders said the fall has been compounded by big hedge funds unwinding short-dollar positions totalling $5-7 billion in the offshore non-deliverable forwards market.
Onshore six-month dollar/rupee forwards have risen to a 1.79 percent premium on Monday from a 1.63 percent premium a week ago, putting pressure on the spot market.
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