Indian Rupee Drops Most in More Than a Week on Deficit Concerns

India’s rupee dropped the most in more than a week on concern slowing capital inflows will make it more difficult to finance the nation’s record current-account deficit.

Global funds bought a net $491 million of Indian stocks this month through March 7 after adding more than $4 billion in each of the past three months, exchange data show. The currency strengthened briefly after a government report showed the trade deficit narrowed to $14.9 billion in February from about $20 billion the previous month. Exports rose 4.2 percent from a year earlier, the fastest pace in 12 months. Imports climbed 2.6 percent.

“The challenge posed by the external accounts remains significant and remains the key medium-term risk,” said Sacha Tihanyi, a senior foreign-exchange strategist at Scotiabank in Hong Kong. “Any event that interrupts financial-account inflows will be exacerbated by the trade deficit and hinder the rupee’s ability to sustain stronger levels.”

The rupee declined 0.2 percent to 54.4125 per dollar in Mumbai, the biggest loss since March 1, according to data compiled by Bloomberg. It rose as much as 0.2 percent earlier. One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, rose seven basis points, or 0.07 percentage point, to 9.25 percent.

The Dollar Index, which tracks the greenback against six trading partners, approached its highest level in seven months after reports last week showed the jobless rate dropped and employment increased.

Current Account

The shortfall in India’s current account, the broadest measure of trade, is a “greater worry” than the nation’s fiscal deficit, Finance Minister Palaniappan Chidambaram said in his Feb. 28 budget speech. The gap, a record 4.2 percent of gross domestic product in the 12 months through March 2012, is expected to be “significantly higher” this year, central bank Governor Duvvuri Subbarao said Feb. 11.

Three-month onshore rupee forwards traded at 55.45 per dollar, compared with 55.34 on March 8, according to data compiled by Bloomberg. Offshore non-deliverable contracts were at 55.40 versus 55.36. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.

Before it's here, it's on the Bloomberg Terminal.