Rupee may lose more as falling stocks hurt

Mumbai: The rupee has dropped 1.8% against the dollar this month and analysts say it could fall further as foreign funds pull money from emerging markets to invest in less riskier US assets.

A widening Indian trade deficit on the back of firm crude oil prices and robust import demand, coupled with a recent dollar rebound abroad, could see the rupee ease by June-end to its lowest in a year, beyond 46 per dollar, analysts say.

The Reserve bank of India (RBI), which has so far been absorbing dollar inflows from foreign funds to keep exports competitive, may have to reverse course and sell dollars to prevent a sharp slide in the local unit, dealers said. In that event, rupee liquidity in the money markets could tighten and send interest rates higher.

“We are expecting foreign fund inflows into emerging markets like India to slow and we could even see possible outflows into US dollar assets,” said R K Gurumurthy, head of trading, financial markets, at ING Vysya Bank in Bangalore.

“We are expecting the rupee to ease to 46.25 by June-end, though the Reserve Bank is likely to smooth the fall.”

The partially-convertible rupee weakened to a new 2006 low of 45.82 per dollar on Monday with sentiment jittery after a 10% stock slide sparked concerns that foreign flows into the stock market could ease.

It joined other Asian currencies, which fell on worries that accelerating inflation and high U S interest rates could lead to growing risk aversion among global investors for emerging markets. Higher US rates make emerging market assets less alluring to risk-averse investors.

The rupee recovered to 45.58/59 in late deals, supported by the central bank.

At its lowest, it lost as much as 0.55% from Friday’s close of 45.55/56. Broadly, the rupee has lost 1.7% this year and is about 4% down from this year’s high of 44.04 hit in January.