Feb. 17 (Bloomberg) -- India’s rupee dropped the most in three months on speculation the nation’s current-account deficit will swell as a global recession hurts exports.
The currency slid to a two-month low after the benchmark stock index posted the biggest two-day slide in more than a month on concern the government’s plan to borrow record amounts will drive up borrowing costs for businesses and consumers. Trade Minister Kamal Nath said Feb. 13 that overseas sales may increase 15 percent in the year ending March 31, compared with an earlier target of 23 percent.
“The rupee will continue to have a weak undertone because of the deterioration of the current-account balance,” said Krishnamurthy Harihar, treasurer at Development Credit Bank Ltd. in Mumbai. “Exports are slowing because of the poor global economic climate and imports are growing.”
The rupee fell 1.7 percent to 49.67 per dollar at the 5 p.m. close in Mumbai, according to data compiled by Bloomberg. That’s the biggest decline since Nov. 12 and the lowest closing level since Dec. 4.
The median estimate of 25 strategists and economists surveyed by Bloomberg is for the rupee to end the current quarter at 49.06.
The current-account deficit, a broad measure of trade flows, widened to a record $12.5 billion in the last quarter, according to the central bank.
The Bombay Stock Exchange Sensitive Index, or Sensex, fell 2.9 percent, extending yesterday’s 3.4 percent loss.
Government Borrowing
Prime Minister Manmohan Singh’s government is borrowing more to fund spending to revive Asia’s third-largest economy. Growth may slow to 7.1 percent in the year to March 31, 2009, the weakest in six years, according to government estimates. Singh, bracing for a general election due by May, announced a 21 percent pay increase for about 5 million government employees and waived $17 billion of farm loans this fiscal year.
Spending will rise 6 percent to 9.53 trillion rupees in the year starting April 1, Foreign Minister Pranab Mukherjee told lawmakers yesterday. That will result in a budget gap of 5.5 percent of gross domestic product by March 31, 2010, compared with a 3 percent target, he said. Borrowing in the year starting April 1 will be 3.62 trillion rupees.
“We expect the rupee to depreciate,” said K. Ramanathan, who helps manage the equivalent of $500 million at ING Investment Management in Mumbai. “Exports have dwindled. Capital flows are not positive. The only savior is the foreign direct investment. We need to see if the good FDI number is sustainable going forward. We doubt so.”
Offshore contracts indicate traders bet the rupee will trade at 50.12 to the dollar in a month, compared with expectations for a rate of 49.00 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.
India’s overseas shipments fell 22 percent in January from a year earlier, declining for the fourth month in a row, according to Trade Secretary Gopal K. Pillai. The slump may continue for several months, Pillai said in a Jan. 28 interview.
Source : www.bloomberg.com