India’s rupee dropped to a seven-week low on concern slowing growth will hamper the government’s ability to rein in the widest budget deficit among the largest emerging markets.
India plans to narrow the gap to 4.8 percent of gross domestic product in the year through March 2014 from an estimated 5.2 percent, Finance Minister Palaniappan Chidambaram said in his budget speech yesterday. The 2014 shortfall is likely to be 5 percent due to “optimistic” revenue assumptions, while spending hasn’t been reined in, Goldman Sachs Group Inc. said in research note dated Feb. 28. Economic growth last quarter was slower than economists predicted, official data show.
“The budget may be negative for investor sentiment and for the rupee, at least in the short term,” Tushar Poddar, a Mumbai-based economist at Goldman, wrote in the report. “The consolidation may not be material enough to provide space for the Reserve Bank of India to enact a significant amount of rate cuts” and support growth, he wrote.
The rupee declined 1 percent to 54.9050 per dollar in Mumbai, according to data compiled by Bloomberg. It touched 54.9450 earlier, the weakest level since Jan. 9. The currency, which fell 1.3 percent this week and lost 2.1 percent in February, will reach 55 in three months, according to Goldman.
One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, rose 30 basis points, or 0.30 percentage point, to 9.90 percent, data compiled by Bloomberg show. The rate rose 40 basis points this week.
The shortfall in India’s current account, the broadest measure of trade, is expected to be “significantly higher” in the year through March 2013 than the previous period’s record 4.2 percent of GDP, RBI Governor Duvvuri Subbarao said Feb. 11.
This gap is a “greater worry” than the fiscal deficit, Chidambaram said yesterday. “This year, and perhaps next year too, we have to find over $75 billion to finance the current-account deficit,” he said.
India’s GDP rose 4.5 percent last quarter, the slowest pace since 2009, a government report showed yesterday. That was less than the 4.9 percent growth predicted in a Bloomberg survey.
Three-month onshore rupee forwards traded at 56 per dollar, compared with 55.45 yesterday, according to data compiled by Bloomberg. Offshore non-deliverable contracts were at 55.98 versus 55.44. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.