Falling indices drag rupee to 3-week low

MARKET ROUND-UP

Rupee dropped the most in almost three weeks, as the benchmark stock index extended declines for a third day, spurring concern overseas funds will slow purchases of domestic equities.

The rupee also fell on speculation the central bank was selling it to prevent a stronger currency from widening the trade deficit. The rupee reached a 16-month high last week as net purchases of domestic shares by global investors more than doubled in the two weeks ended February 9.

"The stock market is due for a correction, and the past few days suggest things aren't that great for equities,'' said R A Sankaranarayanan, chief of trading at state-owned Bank of India in Mumbai. "The rupee is also closer to a level the market fears is the far end of its strength.''

The rupee fell 0.1 per cent to 44.2062 against the dollar at the 5 pm close of trading in Mumbai, according to data compiled by Bloomberg. It may weaken to as low as 45 in three months, Sankaranarayanan said.

Global funds bought almost $600 million more of local equities than they sold between January 29 and February 9, compared with $234.4 million between January 15 and January 26, according to data made available by the Securities and Exchange Board of India.

The Sensex fell 0.7 per cent today following yesterday's biggest drop in almost two months.

The central bank uses a gauge of the rupee's value against currencies of major trading partners to decide when to intervene.

An index compiled by JP Morgan Chase & Co that seeks to mirror the central bank's real-effective exchange rate is trading near a one-year high of 109.42.

"Sustained support at a particular level for the dollar suggests the central bank is present in the market for a while now,'' said D Sampath Kumar, treasurer at IndusInd Bank in Mumbai. "That trend will continue in the near term.''

The rupee pared losses on speculation foreign direct investment is accelerating into Asia's fourth biggest economy, as companies including Vodafone group buy shares in local companies. Vodafone will buy control of Hutchison Essar, the country's fourth-biggest mobile phone operator, it said yesterday.

FDI into Asia's fourth-biggest economy may double to $12 billion in the financial year ending March 31, Trade Minister Kamal Nath said last week.

"The capital inflows, including those from foreign direct investment, are heavy and people are just waiting to sell dollars,'' said Pradeep Khanna, chief currency trader at HSBC.

Holdings in Mumbai. "If the authorities move out of the market, we can see the rupee gaining more than a per cent'' within a few days.

Gains in the rupee fuel imports while making the country's goods and services costlier to overseas customers. The nation's current account deficit widened to $11.7 billion in the six months through September 30, from $7.2 billion a year earlier.

"If the central bank doesn't step away from the market, we can see the rupee weaken a quarter per cent in a few days,'' HSBC's Khanna said.

The rupee weakened in the forwards market. Investors who want to buy forward contracts to purchase dollars a year from now using rupees need to pay 2.93 per cent more than the exchange rate in the cash market, compared with 2.89 per cent yesterday, Bloomberg data show.