The rupee declined, snapping a six-day gain, on concern overseas investors will pull more funds from the country's shares.
Global funds sold $1.3 billion more Indian equities than they bought this year through February 7, exchange data show, while the rupee has dropped 1.7 per cent in 2011. Sentiment in the stock market is putting pressure on the currency, said Naveen Raghuvanshi at Development Credit Bank Ltd. The Bombay Stock Exchange's Sensitive Index, or Sensex, lost 4 per cent this month and reached a seven-month low on Wednesday.
"The equity sell-off by foreign and domestic investors has turned sentiment negative," according to Raghuvanshi, a Mumbai- based currency trader. "There's no fundamental weakness in the currency."
The rupee fell 0.4 per cent to 45.4875 per dollar as of the 5 pm close in Mumbai, according to data compiled by Bloomberg.
Investor confidence in India, the world's second-worst performing stock market this year, may be hurt as rising interest rates cause economic growth to slow, according to Credit Suisse Group AG.
The pace of expansion may cool to 7.7 per cent in the year ending March 31, 2012, from an estimated 8.4 per cent this year, Robert Prior-Wandesforde, the Singapore-based head of India and Southeast Asia economics at Credit Suisse, wrote in a report on Wednesday. The government on February 7 predicted gross domestic product will rise 8.6 per cent this year, the fastest rate in three years.
The central bank last month raised interest rates for the seventh time since March to control inflation.
11-year bonds dip
The yield on India's 11-year bonds fell a second day on speculation government spending will improve cash availability in the banking system.
Reserve Bank of India Deputy Governor Subir Gokarn said in Mumbai on January 27 the government will use surplus cash with the central bank for spending on projects in the financial year beginning April 1. The overnight call money-market rate, at which banks lend to each other, has averaged 6.63 per cent this month, compared with 6.5 per cent in January, indicating cash in the banking system remains tight. "Government spending is picking up, which is expected to curb a rise in yields," said A Y Shedshale, Mumbai-based deputy general manager at Bank of Maharashtra.
The yield on the 8.13 per cent bond due September 2022 declined one basis point to 8.22 per cent as of the 5 pm close in Mumbai, according to the central bank's trading system. The price rose 0.06, or 6 paise per Rs 100 face amount, to Rs 99.31.
The cost of one-year interest-rate swaps, or derivative contracts used to guard against fluctuations in borrowing costs, was little changed at 7.48 per cent, compared with Monday's 7.4850. It touched 7.54 per cent earlier, the highest level since October 2008.
Call rates decline
The call money rate ended lower at 6.50 per cent from overnight closing level of 6.65 per cent. It moved in a range of 6.70 per cent and 6.50 per cent. The Reserve Bank of India (RBI) under the Liquidity Adjustment Facility (LAF) purchased securities worth Rs 40,150 crore from 26 bids at the one-day repo auction at a fixed rate of 6.50 per cent, while sold securities worth Rs 700 crore from one bid at the one-day reverse repo auction at a fixed rate of 5.50 per cent.
