Re near 5-week low on pullout fears

MARKET ROUND-UP

The rupee closed near the lowest in five weeks on speculation that a slump in stocks from last month's record will prompt global investors to pull out their funds.

The Sensex yesterday dropped the most in eight months after Finance Minister Palaniappan Chidambaram included a tax increase on dividends in the Budget. The rupee may fall after recent central bank purchases of dollars make the US currency more expensive as companies seek to pay interest on overseas loans before the financial year ends on March 31.

"The trend now is for the rupee to weaken, and the extent depends on how much more stocks can correct," said Vikas Babu, a currency trader at state-owned Andhra Bank in Mumbai.

"The pressure to weaken will also be more pronounced as the financial year ends and demand for dollars exceeds supply,'' h added.

The rupee ended the day at 44.2625 a dollar at 5 pm in Mumbai, compared with 44.2762 yesterday, according to Bloomberg data. It may fall to 44.5 this month, Babu said.

The Sensex slid 8.2 per cent in February, its first monthly decline since May 2006, as some investors judged gains that doubled it in the past two years may be overdone. A report yesterday showed economic growth unexpectedly slowed to 8.6 per cent last quarter, from 9.2 per cent the previous three months.

The currency erased early losses after the index rebounded 1.7 per cent today following yesterday's 4 per cent drop.

The central bank probably purchased dollars to stem gains in the local currency after it advanced 5.1 per cent in the six months through January, central bank data show.

Foreign exchange reserves, which provide an indicator of the central bank's currency purchases, rose $3.8 billion in the week ended February 16, following a record addition of $5 billion the prior week, the Reserve Bank of India said on February 23.

"There has been a great deal of support for the dollar at these levels from the central bank and a lot of people have sold dollars betting the rupee will appreciate,'' said Ravi Pai, chief of currency trading at HDFC Bank in Mumbai. "When payments are due in the next couple of months, we will see a weaker rupee.''

The currency may drop to 45.2 against the dollar in two months, Pai said.

In the forwards market, investors who want to sell dollars a year from now using rupees receive 3 per cent more than the current exchange rate, compared with 3.16 per cent yesterday, Bloomberg data show.

The rupee may also decline on concern that a surge in crude oil prices will increase import costs for Asia's fourth-biggest economy, which depends on shipments from abroad to meet three-fourths of its annual energy needs.

Crude oil futures in New York have surged more than 20 per cent since they touched a 20-month low on January 18.

"India is a net importer and financing the trade gap is always a concern,'' Andhra Bank's Babu said.

Imports in January grew faster than exports, widening the trade deficit to $5.8 billion, the ministry of commerce & industry said today. The cost of oil imports rose 15 per cent to $4.8 billion.