Rupee slumps on suspected selling by central bank

MARKET ROUND-UP

India's rupee slumped the most in almost three weeks on speculation the central bank will sell the currency after it reached a 19-month high yesterday.

The Reserve Bank of India has repeatedly said that excessive volatility in the currency is undesirable, though it doesn't have an exchange-rate target.

The rupee snapped five days of gains on concerns that a 1.3 per cent rally this month will prompt the central bank to act so as to protect exporters, whose overseas shipments of goods account for 10 per cent of the economy.

"The rise in the rupee has heightened speculation of the central bank doing something,'' said M A Sardesai, treasurer at state-owned Bank of Maharashtra in Mumbai. "It may have to intervene to help exporters.''

India's currency fell by 0.6 per cent to 43.73 to the dollar at 5 pm in Mumbai, according to data compiled by Bloomberg. Sardesai didn't provide a forecast. A stronger currency squeezes the profits of exporters such as Infosys Technologies, the country's second-biggest software maker.

"If the currency appreciates beyond a point, it will hurt our margins,'' said V Balakrishnan, Infosys' chief financial officer in Bangalore. "Currently, the volatility is too high. It will hurt everybody.''

India's export growth slowed to 5.5 per cent in January, the least since October 2003, according to data compiled by Bloomberg.

Prime Minister Manmohan Singh's government is aiming to increase exports by 20 per cent in the year ending March 31 so as to boost industrial growth and accelerate economic expansion.

India's rupee may still be supported by foreign inflows into the nation's stocks as investors seek to benefit from economic growth that is the second-fastest among the major economies in the world after China.

The benchmark Sensex has gained for the past four days. According to SEBI data, the net purchases by overseas fund managers upto March 21 have been $1.08 billion.

"The rupee may resume its rising trend because the flows will remain strong,'' said L V Prasad, chief currency trader at IndusInd Bank in Mumbai. "The undertone is still in favour of the rupee.''

The rupee may still fall on speculation that importers, who need dollars to pay for overseas purchases, will take advantage of the currency's rally to save on foreign-exchange costs.

"Its certainly an opportunity for importers since we see such kind of appreciation quite rarely,'' Bank of Maharashtra's Sardesai said.