India Rupee Drops on Outflow Concern as Goldman Says Sell Stocks

India’s rupee fell on concern outflows from stocks may intensify after Goldman Sachs Group Inc. recommended cutting holdings amid the slowest growth in a decade.

The Reserve Bank of India, which restricted cash supply last month to buoy the rupee, said July 30 the steps will be rolled back as the currency stabilizes. The central bank also lowered its growth forecast to 5.5 percent for the year through March 2014 from 5.7 percent. Goldman yesterday cut its rating on Indian shares to underweight, and said it sees “increasing risk of a potential flow reversal.” The rupee pared losses after the RBI today tightened hedging rules for foreigners.

“The Goldman report was a disturbing factor,” said Naveen Raghuvanshi, a trader at Development Credit Bank Ltd. in Mumbai.

The rupee declined 0.2 percent to 60.45 per dollar in Mumbai, after dropping as much as 0.9 percent earlier, according to prices from local banks compiled by Bloomberg. The central bank also probably sold dollars today to support the rupee, according to two traders with knowledge of the matter, who asked not to be named as the information isn’t public. The Indian currency touched a record low 61.2125 on July 8.

Overseas investors pulled $3 billion from Indian stocks and bonds last month on concern the Federal Reserve will pare stimulus that drove demand for emerging-market assets. While data in the U.S. showed gross domestic product grew more than economists estimated in the second quarter, the Fed said yesterday persistently low inflation poses a risk.

Hedging Rules

Money managers, who have issued so-called participatory notes to investors or hedge funds not registered in India, need to provide a mandate from them stating an intention to hedge, the RBI said in a statement on its website today. Banks in India executing currency trades on behalf of overseas funds need to verify such mandates, the RBI said.

One-month implied volatility, a measure of expected moves in the exchange rate used to price options, fell 55 basis points, or 0.55 percentage point, to 13.25 percent.

Three-month onshore rupee forwards rose 0.9 percent to 61.70 per dollar, data compiled by Bloomberg show. Offshore non-deliverable contracts rose 0.9 percent to 61.83. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.

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