Rupee drops to record low on capital outflow fears

As the weak Asian stock markets heightened fears of capital outflows the rupee slipped to record lows on Monday. Analysts expect it to weaken more in the near term. At 10:23am, the partially convertible rupee was at Rs51.67/68, 1.1% down from Friday’s close of Rs51.10/12. The rupee traded as low as Rs52 per dollar according to Reuters data, although dealers said it was likely to have been a mishit that could be reversed with the counterparty later in the day. They said without that trade, the low was around Rs51.8 per dollar, which would still be a record low. The rupee shed 2.7% last week, its worst performance since the week to 14 November when it fell 2.8%.

Dealers said a number of factors had hit the rupee, including worsening economic data, falling stocks, importers buying dollars in anticipation of further weakness, and arbitrage plays between the onshore spot market and offshore derivative markets. Traders said exporters were cancelling orders set when the rupee was much stronger, adding to demand for dollars, and firms which had foreign currency liabilities were also seeking dollars. J. Moses Harding, head of global markets at IndusInd Bank, expects the rupee to strike Rs53 per dollar in the near term. The BSE Sensex has fallen nearly 10% in 2009, with foreign fund withdrawing about $1.7 billion. The outflows have been a key driver for the rupee. In 2008, the rupee fell 19.1% on the back of net sales of more than $13 billion of stocks by foreign funds. HSBC, which has forecast the rupee could fall to Rs54 per dollar by end-2009, said the current account and government deficits were likely to be the worst since the 1991 crisis. “We expect the external shortfall to exceed 3% of GDP in 2008-09, the highest for more than 50 years, while the combined central and local government deficit will come within a whisker of 10%,” HSBC economist Robert Prior-Wandesforde said.