Nov. 11 (Bloomberg) -- India's rupee dropped by the most in almost two months on speculation overseas investors will cut local holdings as Asian corporate profits shrink amid an economic slump.

The currency ended two days of gains as a slump in stocks indicated global funds are paring investments in local equities. The rupee fell from a five-week high on speculation investors sold the currency in the overseas forward market, betting capital outflows will increase.

``The rupee is weaker because equities were lower across Asia, raising concerns about capital outflows,'' said Sudarshan Bhatt, chief currency trader at state-owned Corporation Bank in Mumbai. ``Selling in non-deliverable forwards is also influencing the local market.''

The rupee weakened 1.5 percent to 48.12 per dollar at the 5 p.m. close in Mumbai, according to data compiled by Bloomberg. The decline was the biggest since Sept. 16.

The Bombay Stock Exchange's Sensitive Index fell 6.6 percent, the most since Oct. 24. Funds based abroad sold local equities worth a record $12.6 billion more than they bought this year, data released by the Securities and Exchange Board of India show.

Growth in India's industrial production declined to 1.3 percent in August from a year earlier, the slowest on record, a government report showed last month. Companies including Ashok Leyland, India's second-biggest maker of commercial vehicles, and JSW Steel Ltd., the nation's third-biggest producer, announced production cuts this month.

Downside Risks

``We believe the downside risks to growth in India have increased,'' Barclays Capital said in a research report. The central bank won't ``cap the currency at any particular level and will manage the pace of depreciation.''

The local currency touched a record low of 50.29 a dollar on Oct. 27 before rebounding as much as 6.6 percent. The central bank stemmed rupee losses by selling dollars. Foreign-exchange reserves dropped for six straight weeks through Oct. 31, Reserve Bank of India data show, indicating the monetary authority intervened.

Barclays expects the rupee to decline to as low as 53 by the end of the year, and said its view ``assumes that risk aversion toward emerging markets and the global growth slowdown'' will continue in the next few quarters.

India's gross domestic product may increase 6 percent in the next two to three quarters, a pace not seen since March 2003, the report said.

Offshore forward contracts show traders increased bets for how much they predict the rupee will depreciate over the next month, showing an implied rate of 48.72 a dollar compared with 47.83 yesterday.

Forwards are agreements in which assets are bought and sold at current prices for future delivery. Indian rupee forwards traded overseas are non-deliverable, meaning they are settled in dollars rather than the local currency.

To contact the reporters on this story: Anil Varma in Mumbai at avarma3@bloomberg.net.

Last Updated: November 11, 2008 07:11 EST