June 23 (Bloomberg) -- The Reserve Bank of India's first interest-rate increase in 15 months is turning into a case of too little, too late for the rupee.

Investors Pictet Asset Management Ltd. and Aberdeen Asset Management Plc, among the biggest enthusiasts for India, the past two years, can't sell the rupee fast enough. They say the quarter-percentage point boost in the benchmark rate to 8 percent on June 11 isn't enough to prevent the highest rate of inflation since 1995 from damaging the economy.

The rupee shows no signs of reversing its slide as Asia's worst-performing currency, falling 6.5 percent this quarter against the dollar. UBS AG, the second-biggest foreign-exchange trader, acknowledged the current pessimism by paring the gains it anticipated for the currency earlier this year.

``They need to do more to regain investor confidence,'' said Wee-Ming Ting, head of Asian fixed income in Singapore for Pictet, which is part of Switzerland's largest privately held bank for the wealthy and oversees about $136 billion. ``We're already short the rupee as we prefer other currencies.'' A short position profits when the price of an asset declines.

Rising oil and food prices caused wholesale prices to rise 11.05 percent in the first week of June, the most in 13 years. Inflation is eroding spending power in India, where the World Bank estimates about half the population of 1.1 billion struggles to survive on less than $2 a day.

Underestimating Inflation

That in turn has weakened the rupee, increasing the cost of imports, causing investors to flee and further weakening the balance of payments. Foreign fund managers, who bought $19.5 billion in Indian stocks and bonds in 2007, sold $5.3 billion this year, according to data provided by the Securities & Exchange Board of India.

Lehman Brothers Holdings Inc. estimates the current account deficit may swell to 3 percent of gross domestic product next year, up from 1.4 percent in 2008 and the same as in 1991, during the country's balance of payments crisis. Back then, the rupee tumbled 42 percent over three years.

Central bank Governor Yaga Venugopal Reddy refrained from raising rates for more than a year, while the government revised its inflation estimates higher in each of the first 15 weeks of 2008 by an average of 0.8 percentage point.

India's currency has lost the gains made when the central bank raised the overnight lending rate on June 11 and traded at 42.9725 a dollar as of 3:05 p.m. in Mumbai, according to data compiled by Bloomberg. It has slumped 8.3 percent in 2008, the worst start to a year since 1993, when it depreciated 8.75 percent in the same period.

India Penalized

The rupee is the only currency to decline this year among the so-called BRIC nations of Brazil, Russia, India and China, which the International Monetary Fund says accounted for almost half of global expansion last year. Brazil's real has climbed 10.8 percent, Russia's ruble has gained 4.2 percent and China's yuan has rallied 6.3 percent.

The difference between India and other BRICs is that Russia is a net exporter of oil, while Brazil is the world's biggest exporter of beef, coffee, orange juice and sugar. China posted a record $262 billion trade surplus in 2007 and has $1.68 trillion of currency reserves.

India imports about 75 percent of its oil, which has almost doubled in price in the past year. The rising cost added to the shortfall in the country's current account, a broad measure of trade and investment flows. The deficit widened to a record $13.4 billion in 2007, central bank data show.

`Twin Deficits'

The opposition Bharatiya Janata Party said Prime Minister Manmohan Singh's Congress party is too focused on economic growth while neglecting to manage inflation. With elections less than a year away, Singh waived more than $17 billion in loans owed by farmers, and a government panel recommended higher salaries for 4 million state employees.

India's budget deficit may widen to 9.1 percent of GDP in the fiscal year ending March 31, from 6 percent last year, Lehman analysts Sonal Varma and Robert Subbaraman wrote in a June 16 report. The ``twin deficits'' in trade and government finance may drive investors away, causing the rupee to drop to 43.50 a dollar by Sept. 30, they wrote.

``Until inflation slows, this crisis is only going to widen,'' said Jagdish Shettigar, head of economic policy at the opposition BJP in New Delhi.

Stronger monetary measures are needed to stem inflation as India faces ``difficult times,'' Finance Minister Palaniappan Chidambaram told reporters on June 20.

Not Like '91

India has more ammunition to avert a plunge in its currency than in 1991, when it pledged its gold to the Bank of England and devalued the rupee in two stages. India had $301 billion in foreign-currency reserves, the fourth-highest amount in the world, after Singh's opening of the economy helped support five years of growth averaging 8.8 percent.

UBS predicts the rupee will strengthen to 40.5 this year compared with an original forecast of 39 as foreign direct investment rises, said Bhanu Baweja, the firm's London-based head of emerging-market currency strategy. The government forecasts investments will climb 42 percent to $35 billion this fiscal year.

``India isn't facing the same situation as it did in 1991, certainly not by a long shot,'' said Phoon Chiong Tuck, chief investment officer in Singapore at Deutsche Asset Management (Asia) Ltd., who helps manage the equivalent of $39 billion in assets. ``The structural reforms, the financial resilience and the reserves have given confidence.''

Stocks and Bonds

Deutsche Asset, a unit of Deutsche Bank AG, still cut investment in India and favors assets in China and Singapore, where rising currencies are curbing inflation. Deutsche Bank, the biggest currency trader, recommended clients sell the rupee in a June 20 report, and expects it to fall to 43.4 by year-end.

The rupee has slumped even as the central bank bought almost $25 billion to support the currency through April.

``Unless India's central bank is prepared to see its reserves run down quite quickly, it will be difficult for them to achieve a dramatically stronger rupee,'' said Peter Redward, head of research for emerging Asia at Barclays Plc, the third- biggest currency trader, in Singapore, which predicts the rupee will drop to 44 by Sept. 30.

Currency reserves are also being eroded by the $5 billion in sales of the country's stocks and bonds by foreign investors.

``The market is saying the RBI hasn't done enough,'' said Edwin Gutierrez, who manages $5.5 billion in emerging-market debt in London for Aberdeen, Scotland's largest independent money manager. The fund has a ``short'' position on the rupee. ``The credibility is still not there, but those who are talking of doomsday are a bit dramatic.''

To contact the reporters on the story: Anoop Agrawal in Mumbai at aagrawal8@bloomberg.net; Patricia Lui in Singapore at plui4@bloomberg.net.

Last Updated: June 23, 2008 05:42 EDT