• Home
• /
• Business

Indian rupee to fall 7 per cent on stock sales, says Barclays

MUMBAI - India's rupee will fall 7 per cent by year-end as overseas investors sell the nation's stocks and a decline in capital inflows widens the current-account deficit, according to Barclays Plc.

The currency will weaken to a 20-month low by December 31 as the broadest measure of trade worsens during the fiscal year ending March 31 due to the decline in investment inflows, said Peter Redward, head of research for emerging Asia at Britain's third-largest bank. Barclays' forecast for the rupee is more bearish than all the 26 respondents in a survey conducted by Bloomberg News.

"We are likely to go through a situation where investors step away from the market," Singapore-based Redward said in a telephone interview."That will create pockets where the capital inflows don't match the current-account deficit and weaken the currency."

The rupee fell 0.2 per cent to 42.75 per dollar at 11:31 a.m. in Mumbai, having fallen 7.8 per cent this year, according to data compiled by Bloomberg. It touched a 15-month low of 43.4750 on July 1. The currency will weaken to 44 by September 30 and 46 by December 31, the lowest since September 2006, Barclays forecast.

India's current-account deficit widened 78 per cent in the financial year ended March to a record $17.4 billion, or 1.9 per cent of gross domestic product, the central bank said on June 30. The shortfall may increase to 2.75 per cent of GDP this fiscal year, Redward said.

Downside risk

"Investors looking at the currency are primarily focused on the dynamics of the balance of payments and the concerns about funding the current-account deficit," Redward said.

"Capital inflows are scarce in this environment, which is a downside risk to the rupee."

Overseas investors have sold $7 billion more Indian shares than they bought this year, after making record net purchases of $17.2 billion in 2007, according to data from the Securities & Exchange Board of India. Stocks in China and India are bargains after declines this year dragged down valuations in Asia's two largest emerging markets, Templeton Asset Management Ltd.'s Mark Mobius said.

"We've been rearranging the portfolio based on valuations, which have come down pretty dramatically in places like India and China, where there've been big declines," Mobius, who oversees $47 billion of emerging-market equities as executive chairman of Templeton, said in an interview from Toronto.

Budget deficit

The widening budget deficit is also keeping away overseas investors, Redward said. The shortfall may increase to 4 per cent of GDP this fiscal year, from 2.8 per cent in the previous 12 months, as the government pays more to subsidise fuel and food, Barclays said.

"We are seeing reassessment of prospects within India and concerns investors are having about the rapidly rising budget deficit," Redward said. The government plans to give oil companies Rs946 billion ($22.1 billion) of bonds this fiscal year to compensate them for selling fuel below cost.

The government does not include the bond issuance in its budget.

Fitch Ratings on July 15 cut India's credit outlook to negative on concern rising subsidies, interest payments and wages will weaken its finances.

The revision was based on "a considerable deterioration in the central government's fiscal position, combined with a notable increase in government debt issuance," James McCormack, Fitch's head of Asia sovereign ratings, said on the same day in a statement.

Long positions

Investors should hold long positions in the Indian rupee, betting the currency will gain as the central bank raises interest rates to curb inflation, according to UBS AG.

The Reserve Bank of India is likely to increase borrowing costs at its next policy meeting on July 29.