Rupee to fall 2% this year, says JPMorgan

ANALYSTS' VIEW

India's rupee, Asia's top-performing currency, may weaken 2 per cent by year-end as global funds reduce holdings in emerging markets, JPMorgan Chase & Co. said in a research note.

Investors around the world are cutting risk on concern contagion from US subprime mortgage losses will slow economic growth in Asia as demand for exports cools.

Foreign inflows this year drove the currency to the highest in nine years and the benchmark stock index to a record. India's gross domestic product is expanding at the fastest rate in almost two decades.

"The general sentiment will be negative for emerging markets and the rupee could be the under-performer because it's one of the biggest beneficiaries of the deluge of flows,'' Vikas Agarwal, a currency and fixed-income strategist at JPMorgan, said in an interview from Mumbai. ``We are biased to expect rupee weakness over the next few months.''

India's currency will end the year at 42 per dollar, Agarwal said. That's more pessimistic than the median estimate of 23 economists surveyed by Bloomberg News over the past month, in which JPMorgan took part, calling the rupee at 40.35.

The rupee fell 0.9 per cent to 41.115 today in Mumbai, adding to last week's 0.7 per cent decline, according to data compiled by Bloomberg. Gains this year have been trimmed to 7.6 per cent, still the best among the 10 most-active currencies in Asia ahead of the Philippine peso. India's markets were closed yesterday for a holiday.

Borrowing Curbs
In the latest endeavor to slow the rupee's gain and protect exports, which account for 12 percent of the economy, the government imposed restrictions on companies' overseas borrowing.

Proceeds of more than $20 million may not be remitted back to India while the central bank's permission will be needed to repatriate funds up to $20 million, the government said on Aug. 7. Loans from abroad rose to $16.1 billion in the year ended March 31 from $2.7 billion the previous year.

"Political will to accept further rupee strength was already suspect,'' Rajeev Malik, a Singapore-based economist at JPMorgan, wrote in the research note. ``The severity of the policy announcement on overseas borrowing served to reinforce the discomfort with any further rupee strength.''

India's economy, Asia's fourth-largest, grew 9.4 per cent in the fiscal year ended March, the fastest since 1989, leading overseas investors to buy more stocks, with purchases exceeding those for the whole of 2006.

Share Sales
Latest figures from India's stock market regulator show investors have already been spooked as the subprime crisis spills over into credit markets.

The rupee has lost almost 2 per cent since reaching its nine-year high on July 24 as the global rout in equities triggered a 8.2 percent decline in the Bombay Stock Exchange Sensitive Index of shares, or Sensex.

Global funds offloaded $128.7 million of stocks more than they bought on August 14, adding to net sales the previous two weeks, according to the Securities & Exchange Board of India.

Growth in exports slowed to 13 percent in the six months through June from 21 percent a year earlier, trade ministry data show. India's top four software exporters last month said a rising rupee curbed earnings.

``A slowdown in inflows along with the recent turmoil in the financial markets has increased our conviction that the rupee is likely to weaken,'' Agarwal wrote. ``There's a possible downside risk to our target.''