By Neha Dasgupta
MUMBAI (Reuters) - Heavy sales in equity and debt by foreign investors ahead of an expected Fed rate hike triggered a 2.4 percent fall in the Indian rupee this month, the worst performer among emerging Asia currencies, pushing it to its weakest level in more than two years.
Foreign funds have sold a net $1.5 billion in bonds and shares so far this month, their biggest since August, marking a reversal from big purchases since early 2014 that had seen India outperform many emerging markets rivals.
The magnitude of the selling, and the impact on the rupee, raise the stakes for the Reserve Bank of India (RBI), which is widely expected to hold rates on Tuesday, as central banks across emerging markets gear up for the U.S Federal Reserve to tighten monetary policy as early as December.
Any impact from a Fed hike could be magnified by concerns that Prime Minister Narendra Modi's government could face a deadlock in the current Parliament session, stalling progress on key legislative bills including the launch of a new Goods and Services Tax (GST).
"If there is some momentum observed on the GST in ongoing Winter session, that will certainly increase market expectation of reforms going forward and can potentially turn around sentiment on INR," said Rohit Arora, an interest rate strategist at Barclays in Singapore.
The rupee was trading at 66.8000/8050 to the dollar as of 0706 GMT on Monday, near a more than two-year low of 66.8950 hit in the previous session. It closed at 66.76/66.77 on Friday.
The currency was headed for a fall of 2.4 percent in November, bigger than all emerging units in Asia, and followed by a drop of 1.6 percent in second-worst performer South Korean won, according to Thomson Reuters data.
Analysts warned the rupee could test 68 to the dollar by late December, depending on the outcome of the Fed's meeting on Dec. 15-16 and the winter session of parliament on Dec. 23.
Still, analysts said they did not expect massive outflows from foreign investors.
RBI Governor Raghuram Rajan has also expressed confidence about India's sturdiness and has built foreign exchange reserves to a near record of $352.37 billion after "Fed taper" fears sent the rupee to a record low of 68.85 per dollar in 2013.
"INR is still a favoured high-yielding currency across emerging markets," Rohit added.
"If you look at it from the fundamentals perspective, it is nowhere near the vulnerabilities that existed in 2013."
(Additional reporting by Swati Bhat; Editing by Subhranshu Sahu)
