Rupee Forwards Drop to Two-Month Low on Global Growth Concerns

India’s onshore rupee forwards fell to the lowest level in almost two months on concern U.S. spending reductions will hurt global growth, damping demand for riskier assets.

President Barack Obama has begun contacting lawmakers in search of a budget compromise as more than $85 billion in cuts began March 1 amid a more than two-year-old impasse over raising taxes and cutting entitlements. Overseas investors sold $237 million more Indian stocks than they bought on Feb. 28, the most in almost a year, the latest exchange data show.

Developments in major economies “have led to a revival in risk aversion,” Surbhi Ogra, a Mumbai-based analyst at ICICI Bank Ltd., wrote in a research report today. “In the near term, the rupee could face some depreciation pressures.”

Three-month onshore rupee forwards ended little changed at 55.98 per dollar in Mumbai after dropping to 56.20 earlier, the lowest level since Jan. 8, according to data compiled by Bloomberg. The currency ended at 54.8650 in the spot market compared with 54.9050 on March 1, after earlier today touching 55.0950, the weakest level since Jan. 8.

One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, rose 33 basis points, or 0.33 percentage point, to 10.09 percent.

The rupee may strengthen to around 50 or 51 by June 30, with the Reserve Bank of India expected to lower interest rates to support growth, according to ICICI Bank. India’s gross domestic product rose 4.5 percent last quarter, the slowest pace since 2009, a government report showed Feb. 28.

‘Realistic’ Budget

Finance Minister Palaniappan Chidambaram’s goal to narrow the budget deficit to 4.8 percent of gross domestic product in the year through March 2014, from an estimated 5.2 percent in the preceding 12 months, is “realistic” and credit-positive for the sovereign, Atsi Sheth, an analyst at Moody’s Investors Service, wrote in a report today. Chidambaram unveiled the annual budget on Feb. 28.

The central bank removed restrictions on overnight and intra-day open positions on foreign-exchange contracts involving the rupee, it said in a statement on March 1. The curbs were placed last year as the currency plunged to a record low of 57.3275 per dollar.

Offshore non-deliverable contracts were at 55.94 versus 56.12. 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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