India’s Rupee Drops on Concern Slowing Growth Will Deter Inflows

India’s rupee fell, snapping a two-day rally, on concern slowing growth will make it tougher for the country to attract capital as the U.S. prepares to taper monetary stimulus.

Gross domestic product rose 4.4 percent in the three months through June from a year earlier, the slowest pace since 2009, according to an official report on Aug. 30. HSBC Holdings Plc today lowered its growth forecast following cuts by UBS AG, Standard Chartered Plc and BNP Paribas SA last week. The U.S. may trim monthly bond purchases this month and end the buying by mid-2014, according to a Bloomberg survey of economists before the Federal Open Market Committee meets Sept. 17-18.

“September will bring a lot of event risk for financial markets to absorb,” Tim Fox, chief economist at Emirates NBD in Dubai, wrote in a research report today. The rupee will stay under pressure and the role of incoming central bank Governor Raghuram Rajan, who takes charge Sept. 5, will be considered “crucial” as growth slows and inflation stays high, he wrote.

The rupee weakened 0.1 percent to 65.7550 per dollar as of 10:33 a.m. in Mumbai, according to prices from local banks compiled by Bloomberg. The currency weakened as much as 0.7 percent earlier and plunged 8.1 percent last month, the biggest drop since March 1992 and the steepest among 78 global currencies tracked by Bloomberg. It touched an unprecedented 68.8450 on Aug. 28.

Global funds withdrew a net $2.4 billion from Indian stocks and bonds last month, leaving the rupee vulnerable to the nation’s current-account deficit. One-month implied volatility in the rupee, a measure of expected moves in the exchange rate used to price options, rose 52 basis points, or 0.52 percentage point, today to 21.25 percent.

Growth Forecasts

HSBC now sees India growing at 4 percent in the year through March 2014, compared with an earlier estimate of 5.5 percent. Standard Chartered predicts the economy will grow 4.7 percent versus 5.5 percent, UBS cut its projection to 4.7 percent from 5.2 percent and BNP to 3.7 percent from 5.2 percent.

The rupee surged 4.8 percent in the two days through Aug. 30, as the Reserve Bank of India started selling dollars to the largest state-run oil importers through foreign-exchange swaps. India ships in about 80 percent of its fuel, and a weaker currency stokes inflation.

U.S. President Barack Obama said he’ll seek authorization from Congress before ordering military action against Syria, easing concern that an imminent strike would disrupt Middle East oil exports.

Three-month onshore rupee forwards rose 0.5 percent today to 67.34 per dollar, data compiled by Bloomberg show, Offshore non-deliverable contracts advanced 2.2 percent to 67.95. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.

To contact the reporter on this story: Jeanette Rodrigues in Mumbai at jrodrigues26@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net

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