India’s Rupee Weakens as Current-Account Deficit Seen at Record

India’s rupee weakened on concern the government will be unable to rein in a record current-account deficit as inflows into equities slow. Bonds declined.

The shortfall in the current account, the broadest measure of trade, widened to $31 billion in the fourth quarter from the previous period’s record $22.3 billion, Bank of America Merrill Lynch predicted in a report yesterday before official data due March 28. Overseas funds have bought a net $1.7 billion of local stocks this month through March 22, compared with purchases of more than $4 billion in each of the previous three months, exchange data show.

“The reliance on portfolio equity inflows will continue in the immediate term,” analysts at DBS Group Holdings Ltd., including Singapore-based David Carbon, wrote in a report today. “With the current-account deficit on course to reach a record high, any help in financing the shortfall is positive.”

The rupee declined 0.3 percent to 54.3650 per dollar in Mumbai, according to data compiled by Bloomberg. One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, fell 63 basis points, or 0.63 percentage point, to 8 percent.

The yield on the 8.15 percent bonds due June 2022 rose four basis points to 7.99 percent, according to the central bank’s trading system. Indian debt and currency markets will be shut tomorrow for a public holiday.

Bond Purchases

The easing of debt-investment rules for foreigners will encourage flows into bonds, according to the DBS note.

All restrictions and sub-limits governing purchases of Indian government and corporate notes will be removed from April 1, while keeping the overall cap at $25 billion for sovereign debt and $51 billion for securities issued by companies, Finance Minister Palaniappan Chidambaram said in New Delhi on March 23. A new “on tap” system will replace the existing auction procedure for foreign investment in corporate bonds, he said.

The overall debt-purchase limit for overseas investors in Asia’s third-largest economy is 4 percent of gross domestic product, compared with a current-account gap of more than 5 percent, according to DBS. The government estimates India needs more than $75 billion of foreign capital this year and next to fund the current-account deficit.

Three-month onshore rupee forwards traded at 55.36 per dollar, compared with 55.26 yesterday, according to data compiled by Bloomberg. Offshore non-deliverable contracts were at 55.32 versus 55.17. 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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