India’s Rupee Has Worst Month Since 1992 on Slowdown Concern
India’s rupee completed its biggest monthly loss since 1992, the world’s worst currency performance, on concern a deepening economic slowdown will deter investors as the U.S. prepares to pare stimulus.
The currency slumped to a record this week as a surge in oil prices amid political tension over Syria threatened to widen the current-account deficit and push Asia’s No. 3 economy toward its biggest crisis in more than two decades. Global funds increased sales of local assets this week as UBS AG, BNP Paribas SA and Standard Chartered Plc cut growth forecasts for India. The rupee pared losses after the central bank said on Aug. 28 it will supply dollars directly to local oil importers.
“Markets are increasingly concerned about a negative feedback loop between the rupee and India’s fundamentals,” analysts at Standard Chartered, including Mumbai-based Samiran Chakraborty, wrote in a research report yesterday. “That said, we think that worries about a 1991-style balance-of-payments crisis are exaggerated.”
The rupee plunged 8.1 percent this month to 65.7050 per dollar in Mumbai, according to prices from local banks compiled by Bloomberg. This is the biggest drop since March 1992 and the steepest among 78 global currencies tracked by Bloomberg. The currency rose 1.4 percent today, paring the week’s loss to 3.6 percent. The rupee touched an unprecedented 68.8450 on Aug. 28.
Prime Minister Manmohan Singh today defended his economic record in parliament in one of his strongest attacks on the opposition, saying policy changes in the past year will help stem the rupee’s plunge and revive growth. A government report today showed the economy expanded 4.4 percent in the quarter to June 30, the slowest pace since 2009 and short of the median 4.7 percent estimated by economists in a Bloomberg survey.
Global funds have withdrawn a combined $2.2 billion from Indian stocks and bonds this month, exchange data show. Brent crude rose 7 percent in August as U.S. Secretary of State John Kerry said President Barack Obama will hold the Syrian government accountable for using chemical weapons against civilians. U.K. Prime Minister David Cameron yesterday failed to gain parliamentary backing for military action.
The rupee surged the most since 1986 yesterday after the Reserve Bank of India said it will sell dollars to the largest oil refiners through swaps to cool demand for foreign exchange. The central bank announced the decision after the currency plummeted the most in 20 years on Aug. 28.
One-month implied volatility, a measure of expected moves in the exchange rate used to price options, surged 693 basis points, or 6.93 percentage point, this month to 20.73 percent.
The rupee pared declines today on speculation the central bank intervened in the currency market to sell dollars, according to two traders, who asked not to be identified as the information isn’t public.
The government will contain the shortfall in the current account to within 3.7 percent of gross domestic product in the year through March 2014, Finance Minister Palaniappan Chidambaram said Aug. 12, from an unprecedented 4.8 percent in the prior period. That would still be higher than the 2.5 percent the RBI considers sustainable.
The rupee’s drop is driven by domestic structural factors, while the speed and timing of the plunge is due to speculation about the U.S. scaling back stimulus, RBI Governor Duvvuri Subbarao, whose term ends next week, said in a speech yesterday. Raghuram Rajan, the economist credited with predicting the 2008 financial crisis, will take charge of India’s central bank on Sept. 5.
Standard Chartered now predicts the economy will grow 4.7 percent this fiscal year, compared with a previous forecast of 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.
Three-month onshore rupee forwards rose 1 percent today to 67.65 per dollar, extending the month’s drop to 10 percent, data compiled by Bloomberg show, Offshore non-deliverable contracts advanced 1.1 percent to 68.30. 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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