Such concerns have compounded because of the likelihood of the Fed tapering its bond purchases, which could trigger an outflow from emerging markets.

Foreign fund selling in Indian equities have picked up pace to add to the huge sell-off in debt markets.

Overseas investors have sold $485 million of Indian shares in five sessions, adding to outflows of $4.7 billion in 18 consecutive sessions of debt selling, as per capital market regulator data.

Inflows are crucial to bridge India’s current account gap and will be needed to fund an estimated $90 billion gap in its balance of payments in the current financial year.

Faced with a sharp fall in the rupee, the government is scrambling to boost investor sentiment and is poised to raise various sectoral caps to boost foreign direct investment, which has slumped.

Dealers said the rupee found some support ahead of the auction of $7.15 billion of government debt quotas for foreigners on Thursday.

There was also some suspected dollar selling related to Unilever’s open offer for its Indian unit which begins on June

21, traders said.

“The immediate cue for the rupee remains the FOMC. If the statement signals a tapering of stimulus, the rupee may breach 59 in early trades on Wednesday,” said Navin Raghuvanshi, associate vice-president at Development Credit Bank.

“My overall view is bearish on the rupee unless the government takes some drastic steps.”

All eyes are on the Fed outcome, due after the close of local trade on Wednesday, and any signs of premature stimulus withdrawal has the potential to roil the rupee.

Moses Harding, head of asset-liability management at IndusInd Bank, expects the FOMC to do a balancing act so as not to roil global markets.

“We need resolutions to in-house woes to trigger rupee recovery into 54-57 (to a dollar) and any undue delay in actions from the government will extend rupee weakness into 59-62,” Harding said.

Credit Agricole has sharply lowered its rupee forecast to 59 to a dollar by end-September from 53.25, highlighting the currency’s difficulty to fund its financial constraints.

The partially convertible rupee closed at 58.71/72 per dollar, as against its previous close of 58.77/78 on Tuesday, snapping two sessions of losses.

In the offshore non-deliverable forwards, the one-month contract was at 59.11, while the three-month was at 59.78.

In the currency futures market, the most-traded near-month dollar/rupee contracts on the National Stock Exchange, the MCX-SX and the United Stock Exchange all closed around 58.81 with a total traded volume of $5.6 billion. (Editing by Prateek Chatterjee)

Such concerns have compounded because of the likelihood of
the Fed tapering its bond purchases, which could trigger an
outflow from emerging markets.

Foreign fund selling in Indian equities have picked up pace
to add to the huge sell-off in debt markets.

Overseas investors have sold $485 million of Indian shares
in five sessions, adding to outflows of $4.7 billion in 18
consecutive sessions of debt selling, as per capital market
regulator data.

Inflows are crucial to bridge India’s current account gap
and will be needed to fund an estimated $90 billion gap in its
balance of payments in the current financial year.

Faced with a sharp fall in the rupee, the government is
scrambling to boost investor sentiment and is poised to raise
various sectoral caps to boost foreign direct investment, which
has slumped.

Dealers said the rupee found some support ahead of the
auction of $7.15 billion of government debt quotas for
foreigners on Thursday.

There was also some suspected dollar selling related to
Unilever’s open offer for its Indian unit which begins on June
21, traders said.

“The immediate cue for the rupee remains the FOMC. If the
statement signals a tapering of stimulus, the rupee may breach
59 in early trades on Wednesday,” said Navin Raghuvanshi,
associate vice-president at Development Credit Bank.

“My overall view is bearish on the rupee unless the
government takes some drastic steps.”

All eyes are on the Fed outcome, due after the close of
local trade on Wednesday, and any signs of premature stimulus
withdrawal has the potential to roil the rupee.

Moses Harding, head of asset-liability management at
IndusInd Bank, expects the FOMC to do a balancing act so as not
to roil global markets.

“We need resolutions to in-house woes to trigger rupee
recovery into 54-57 (to a dollar) and any undue delay in actions
from the government will extend rupee weakness into 59-62,”
Harding said.

Credit Agricole has sharply lowered its rupee forecast to 59
to a dollar by end-September from 53.25, highlighting the
currency’s difficulty to fund its financial constraints.

The partially convertible rupee closed at 58.71/72
per dollar, as against its previous close of 58.77/78 on
Tuesday, snapping two sessions of losses.

In the offshore non-deliverable forwards, the
one-month contract was at 59.11, while the three-month was at
59.78.

In the currency futures market, the most-traded
near-month dollar/rupee contracts on the National Stock
Exchange, the MCX-SX and the United Stock Exchange all closed
around 58.81 with a total traded volume of $5.6 billion.

(Editing by Prateek Chatterjee)

The rupee is expected to remain hostage to global currency movements ahead of the outcome of the Fed’s monetary policy meeting on Wednesday. Any signal that the U.S. central bank will start to scale back efforts to keep interest rates low would likely result in a shift of funds out of India, dealers said.

Dealers also cited heavy dollar demand from local market participants, which traders attributed to demand related to the government’s defence needs and oil refiners.

The funding of India’s current account deficit remains a big concern for foreign investors. These concerns were reinforced after data on Monday showed trade deficit widened to a seven-month high in May.

The rupee is also being pressured as foreign investors have net sold rupee debt of $4.7 billion over 18 sessions, while outflows from the equity market are also picking up pace.

The Reserve Bank of India was not spotted intervening even as the rupee approached an all-time low of 58.98 hit on June 11, the last time the central bank was seen selling dollars.

“The rupee will depreciate and will surpass its record low, with RBI interventions only delaying the fall. Over time, I see it moving towards 60 to a dollar,” said Param Sarma, chief executive at NSP Forex.

“The trade deficit remains high and capital inflows are not coming through.”

The partially convertible rupee closed at 58.77/78 per dollar, surpassing its previous lowest close of 58.39 seen last week. It had closed at 57.87/88 on Monday.

The rupee’s fall in the late session was also tailing the euro, which moved off four-month highs against the dollar after release of German ZEW data.

Despite concerns about the current account deficit, analysts say recent measures to curb gold demand could help dent imports of the yellow metal, though any such improvements would need time to filter through.

In the offshore non-deliverable forwards, the one-month contract was at 59.17, while the three-month was at 59.78.

In the currency futures market, the most-traded near-month dollar/rupee contracts on the National Stock Exchange, the MCX-SX and the United Stock Exchange all closed around 58.88 with a total traded volume of $7.6 billion.

(Editing by Prateek Chatterjee)

The rupee is expected to remain hostage to global currency
movements ahead of the outcome of the Fed’s monetary policy
meeting on Wednesday. Any signal that the U.S. central bank will
start to scale back efforts to keep interest rates low would
likely result in a shift of funds out of India, dealers said.

Dealers also cited heavy dollar demand from local market
participants, which traders attributed to demand related to the
government’s defence needs and oil refiners.

The funding of India’s current account deficit remains a big
concern for foreign investors. These concerns were reinforced
after data on Monday showed trade deficit widened to a
seven-month high in May.

The rupee is also being pressured as foreign investors have
net sold rupee debt of $4.7 billion over 18 sessions, while
outflows from the equity market are also picking up pace.

The Reserve Bank of India was not spotted intervening even
as the rupee approached an all-time low of 58.98 hit on June 11,
the last time the central bank was seen selling dollars.

“The rupee will depreciate and will surpass its record low,
with RBI interventions only delaying the fall. Over time, I see
it moving towards 60 to a dollar,” said Param Sarma, chief
executive at NSP Forex.

“The trade deficit remains high and capital inflows are not
coming through.”

The partially convertible rupee closed at 58.77/78
per dollar, surpassing its previous lowest close of 58.39 seen
last week. It had closed at 57.87/88 on Monday.

The rupee’s fall in the late session was also tailing the
euro, which moved off four-month highs against the dollar
after release of German ZEW data.

Despite concerns about the current account deficit, analysts
say recent measures to curb gold demand could help dent imports
of the yellow metal, though any such improvements would need
time to filter through.

In the offshore non-deliverable forwards, the
one-month contract was at 59.17, while the three-month was at
59.78.

In the currency futures market, the most-traded
near-month dollar/rupee contracts on the National Stock
Exchange, the MCX-SX and the United Stock Exchange all closed
around 58.88 with a total traded volume of $7.6 billion.

(Editing by Prateek Chatterjee)

The Reserve Bank of India kept its repo rate steady, warning of upwards risks to inflation and global economic uncertainty, in a decision that had been widely expected. A rate cut benefits the rupee by increasing confidence on the economic outlook and sparks hopes of more foreign inflows.

Dealers said the rupee was helped by the central bank’s concern that a falling currency would feed into imported inflation, comments that suggested it would not tolerate large rupee weakness.

Investors said a potentially bigger event would be the Fed’s meeting ending on Wednesday after a recent sell-off in emerging markets helped send the rupee to a record low of 58.98 last week.

“The policy was largely a non-event. The market is now focusing on the FOMC. However, I feel the rupee is steadying as arbitrage with offshore has reduced and may strengthen in the later part of week,” said Satyajit Kanjilal, chief executive at ForexServe.

The partially convertible rupee closed at 57.87/88 per dollar compared with 57.5150/5250 on Friday, its second session of fall in three. It fell to 57.90 in session.

Foreigners have continued to be heavy sellers in Indian debt, pulling out over $4 billion since late May.

The currency managed to recover some losses after the May trade gap came in slightly below market estimates, although it still widened to a 7-month high in May as gold imports surged.

Economists expect newly announced measures to curb gold imports to dampen demand for the precious metal in coming months and narrow the shortfall.

In the offshore non-deliverable forwards, the one-month contract was at 58.20, while the three-month was at 58.81.

In the currency futures market, the most-traded near-month dollar/rupee contracts on the National Stock Exchange, the MCX-SX and the United Stock Exchange all closed around 57.97 with a total traded volume of $5.4 billion.

(Editing by Prateek Chatterjee)

The Reserve Bank of India kept its repo rate steady, warning
of upwards risks to inflation and global economic uncertainty,
in a decision that had been widely expected. A rate cut benefits
the rupee by increasing confidence on the economic outlook and
sparks hopes of more foreign inflows.

Dealers said the rupee was helped by the central bank’s
concern that a falling currency would feed into imported
inflation, comments that suggested it would not tolerate large
rupee weakness.

Investors said a potentially bigger event would be the Fed’s
meeting ending on Wednesday after a recent sell-off in emerging
markets helped send the rupee to a record low of 58.98 last
week.

“The policy was largely a non-event. The market is now
focusing on the FOMC. However, I feel the rupee is steadying as
arbitrage with offshore has reduced and may strengthen in the
later part of week,” said Satyajit Kanjilal, chief executive at
ForexServe.

The partially convertible rupee closed at 57.87/88
per dollar compared with 57.5150/5250 on Friday, its second
session of fall in three. It fell to 57.90 in session.

Foreigners have continued to be heavy sellers in Indian
debt, pulling out over $4 billion since late May.

The currency managed to recover some losses after the May
trade gap came in slightly below market estimates, although it
still widened to a 7-month high in May as gold imports surged.

Economists expect newly announced measures to curb gold
imports to dampen demand for the precious metal in coming months
and narrow the shortfall.

In the offshore non-deliverable forwards, the
one-month contract was at 58.20, while the three-month was at
58.81.

In the currency futures market, the most-traded
near-month dollar/rupee contracts on the National Stock
Exchange, the MCX-SX and the United Stock Exchange all closed
around 57.97 with a total traded volume of $5.4 billion.

(Editing by Prateek Chatterjee)

The upgrade by Fitch also provided a much needed breather to the bond and rupee markets battered by foreign fund outflows.

Fitch has cited the measures taken by the government to contain the budget deficit, and expects it to meet the current fiscal year deficit target of 4.8 percent of the gross domestic product.

“It has come at a time when the rupee has weakened substantially and the markets have corrected drastically. Maybe for overseas investors, it would give them some confidence to stay invested here,” said V. Balasubramanian, vice-president at IDBI Asset Management in Mumbai.

Yields had spiked earlier in the day after data showed on Wednesday that consumer prices remained elevated.

The annual consumer price inflation slowed for the third straight month in May to 9.31 percent, but still remains well above the central bank’s comfort level.

While the Reserve Bank of India considers the wholesale price index as its main gauge of inflation, it is increasingly looking at consumer prices while setting monetary policy.

At the same time, April factory data showed that industrial output grew less than expected at 2 percent, but not slow enough to spur the RBI to cut rates on June 17.

Expectations that India may announce measures to attract foreign investment also failed to curb selling. Foreign funds have pulled out over $3 billion from the debt market in the past two weeks on the rupee’s fall and rising U.S. yields.

“With revised IIP growth of March’13 coupled with higher CPI number, the probability of rate cut seems least likely on June 17 policy meet,” said Shakti Satapathy, a fixed income analyst at AK Capital.

The 7.16 percent 2023 bond yield, which Reuters considers as the new 10-year benchmark, ended 1 basis point lower at 7.29 percent, snapping five sessions of gains. It had risen to 7.35 percent during the session.

Yields have risen 5 basis points so far this month as investors sharply pared expectations of a rate cut next week as a falling rupee raises concerns about inflation and the current account deficit, which the RBI has said would play a role in setting monetary policy.

India is considering simplifying the allocations of government debt limits to foreign investors, including doing away with the current system of auctions, said a source with direct knowledge of the deliberations between the government and regulators.

Interest rate swaps also eased after the Fitch decision. The longer-end five-year swap rate was unchanged at 7.03 percent. The one-year swap rate ended flat at 7.24 percent.

(Editing by Anand Basu and Jijo Jacob)

Inflation is falling, lower oil and gold prices are helping narrow a current account deficit that likely reached 5.1 percent of gross national product last fiscal year. And exports, particularly by software services sector companies like Infosys Ltd (INFY.NS: Quote, Profile, Research), should benefit from the weaker rupee.

The rupee has fallen more than 8 percent since the beginning of May, and although that is the worst performance in Asia, other currencies are also being hit by the broad rally in the dollar. Last year the rupee was largely falling alone.

“Certainly we are not happy with it, but we certainly are not unduly worried,” Arvind Mayaram, Economics Affairs Secretary at the Ministry of Finance, told reporters in New Delhi.

“This is a temporary phase,” Mayaram said, adding that the government expected foreign buying of bonds to emerge in coming days that could lift the rupee.

Worried or not, it took suspected RBI intervention to pull the rupee off a record low of 58.98 per dollar on Tuesday.

It is a sensitive time for Prime Minister Manmohan Singh’s minority coalition, with important state votes due before a national election next year.

The ministry’s chief economic adviser, Raghuram Rajan, said authorities, including the RBI, the SEBI and government, were ready to act if needed to stop a runaway currency market.

Rajan argued that the extent of the rupee’s slide had taken it into undervalued territory. On a trade-weighted basis, however, the rupee is fairly valued to slightly over-valued. In real effective exchange rate (REER) terms, the rupee was at 105.74 in May against six of its key trading partners, above the 100 that denotes fair value.

Though the economy remains sluggish, with weak investment and consumption and the government controlling spending, it is still doing better than a year ago, when credit rating agencies Standard & Poor’s and Fitch threatened to relegate India to “junk” bond status.

The slowdown that resulted in decade-low growth of 5 percent in the fiscal year that ended in March appears to have bottomed out, helped in part by some modest RBI interest rate cuts and the government’s reforms aimed at boosting capital inflows.

Mayaram said strengthening economic fundamentals, as well as policy measures, should persuade the market to revise its short-term view.

The government this month took steps to curb imports by raising duties, while the RBI clamped down on gold financing, largely after the trade deficit surged in April driven by higher demand for cheaper gold.

“The current account deficit is certainly bothersome,” Mayaram said, though adding recent government steps to curb gold imports had “started showing results”.

A weaker rupee should curb demand for gold imports, which make up 11 percent of India’s import bills. That would have a potentially big impact given India is the world’s biggest importer of gold.

Oil prices have also fallen, with Brent crude down 6.7 percent so far this year, making the impact from a weaker rupee easier to sustain.

Before the rupee’s fall accelerated in the past few days, analysts had appeared unalarmed by the rupee’s decline and were expecting a recovery.

A Reuters poll last week suggested the market had expected the rupee to strengthen to 56.50 to the dollar in a month, and gradually improve to 53.78 in over twelve months.

Mayaram stressed other emerging market currencies were in the same boat, citing an 11 percent fall in the South African rand.

In the year so far, the rupee has weakened slightly more than 5 percent. Within emerging Asia, only the South Korean won has done as badly.

The Philippine peso and the Brazilian real have also been weakening.

Last year, in contrast, only the Indonesian rupiah and the rupee declined against the dollar in emerging Asia.

Deutsche Bank, in a June 7 note, said it was not particularly worried about the near or medium-term outlook for the rupee.

“The economy’s outlook is weak, however, and the currency will remain vulnerable to periodic policy setback and global factors,” Deutsche said.

“But the major sources of drag to the currency in recent years, high inflation and high current account deficit, are dissipating rapidly, and will help support the currency.”

(Additional reporting by Manoj Kumar in New Delhi; Editing by Rafael Nam and Simon Cameron-Moore)

The rupee fell 4.8 percent last month, and was the worst performing Asian currency as the dollar rallied broadly on speculation that the Federal Reserve will begin reducing its monetary stimulus later this year.

Trading at 56.65 per dollar on Tuesday, the rupee is not far from a record low of 57.32 hit on June 22, 2012.

Having a currency at an all-time low is not a great advertisement for the government’s management of the economy ahead of important state elections due in coming months and a national election due within a year.

It will also fuel inflation, make it more difficult to fund a current account deficit that was equivalent to a record 6.7 percent of gross domestic product in December, and drive up the cost of oil and gold imports that respectively account for 35 percent and 11 percent of India’s trade bill.

Further global dollar strength and investor risk aversion could spell danger if it leads to continued rupee weakness, and India’s external deficits worsen.

“Foreign investors may start fleeing Indian markets on escalating balance of payments risks,” said Priyanka Kishore, a currency strategist for Standard Chartered in Mumbai.

Sentiment for the rupee has turned the most bearish since November, according to a recent Reuters poll.

Having attracted around $50 billion in inflows since the start of 2012, the rupee is rendered particularly vulnerable to a withdrawal of foreign funds.

That could make the Reserve Bank of India more cautious when it decides whether to cut interest rates in a policy review due in mid-June.

Finance Ministry officials said on Tuesday, however, that India is likely to raise by $5 billion the $25 billion cap on foreign institutional investment in government debt.

But, with parliament gridlocked by the fallout from a corruption scandal, chances appear slim of Prime Minister Manmohan Singh’s minority coalition government delivering far-reaching reforms to generate heavy capital inflows, as it did last September to stave off the loss of India’s investment grade credit rating.

The RBI is unlikely to intervene heavily in markets to prop up the rupee, as it will want to conserve foreign exchange reserves which at $292 billion are just enough to cover seven months of imports, the lowest import cover since 1996.

“We don’t want to lose more reserves. We do not want the import cover to worsen,” said one policymaker familiar with the central bank’s thinking.

Instead, there are expectations that the RBI will use a combination of judicious intervention and administrative steps to dampen speculation against the rupee, without addressing fundamental causes of the currency’s weakness.

Graphic, click link.reuters.com/juz58t

WHAT TO DO

The RBI would be very reluctant to tighten monetary policy to protect the rupee, having given a priority to supporting growth, which fell to a decade-low of 5 percent in the fiscal year that ended in March.

The central bank has reduced its policy interest rate by 75 basis points so far this year, and while analysts have expected a further reduction, the RBI may opt to delay any further easing while the rupee remains weak.

“The rate cutting cycle would likely be slightly delayed as the Reserve Bank of India attempts to balance the dilemma between managing the currency and supporting growth,” Nomura said in a note last week.

When markets become unruly, the RBI typically first resorts to light intervention to quell speculative behaviour, before pulling administrative levers if the rupee continues to move sharply.

That might include telling exporters to immediately convert 50 percent of their overseas earnings to rupees – a measure taken last year – and asking importers to stagger dollar purchases.

The RBI could also supply dollars to oil importers to stop lumpy payments adding to pressure on the rupee.

The government could help by, for example, raising limits for overseas investment in domestic debt, and opening the defence and telecom sectors to more foreign investment, but pensions and insurance sector reforms remain stalled and it is hard for Prime Minister Singh to push through contentious measures.

That leaves the RBI to hold the line.

“Short-term steps might help to stabilise the rupee but would be insufficient if the global tide washes over,” said Radhika Rao, an economist with DBS in Singapore.

(Additional Reporting by Rajesh Kumar Singh in NEW DELHI and Suvashree Dey Choudhury in MUMBAI; Editing by Rafael Nam and Simon Cameron-Moore)

The rupee fell 4.8 percent last month, and was the worst
performing Asian currency as the dollar rallied broadly on
speculation that the Federal Reserve will begin reducing its
monetary stimulus later this year.

Trading at 56.65 per dollar on Tuesday, the rupee
is not far from a record low of 57.32 hit on June 22, 2012.

Having a currency at an all-time low is not a great
advertisement for the government’s management of the economy
ahead of important state elections due in coming months and a
national election due within a year.

It will also fuel inflation, make it more difficult to fund
a current account deficit that was equivalent to a record 6.7
percent of gross domestic product in December, and drive up the
cost of oil and gold imports that respectively account for 35
percent and 11 percent of India’s trade bill.

Further global dollar strength and investor risk aversion
could spell danger if it leads to continued rupee weakness, and
India’s external deficits worsen.

“Foreign investors may start fleeing Indian markets on
escalating balance of payments risks,” said Priyanka Kishore, a
currency strategist for Standard Chartered in Mumbai.

Sentiment for the rupee has turned the most bearish since
November, according to a recent Reuters poll.

Having attracted around $50 billion in inflows since the
start of 2012, the rupee is rendered particularly vulnerable to
a withdrawal of foreign funds.

That could make the Reserve Bank of India more cautious when
it decides whether to cut interest rates in a policy review due
in mid-June.

Finance Ministry officials said on Tuesday, however, that
India is likely to raise by $5 billion the $25 billion cap on
foreign institutional investment in government debt.

But, with parliament gridlocked by the fallout from a
corruption scandal, chances appear slim of Prime Minister
Manmohan Singh’s minority coalition government delivering far
reaching reforms to generate heavy capital inflows, as it did
last September to stave off the loss of India’s investment grade
credit rating.

The central bank is unlikely to intervene heavily in markets
to prop up the rupee, as it will want to conserve foreign
exchange reserves which at $292 billion are just enough to cover
seven months of imports, the lowest import cover since 1996.

“We don’t want to lose more reserves. We do not want the
import cover to worsen,” said one policymaker familiar with the
central bank’s thinking.

Instead, there are expectations that the RBI will use a
combination of judicious intervention and administrative steps
to dampen speculation against the rupee, without addressing
fundamental causes of the currency’s weakness.

WHAT TO DO

The RBI would be very reluctant to tighten monetary policy
to protect the rupee, having given a priority to supporting
growth, which fell to a decade-low 5 percent in the fiscal year
that ended in March.

The central bank has reduced its policy interest rate by 75
basis points so far this year, and while analysts have expected
a further reduction, the RBI may opt to delay any further easing
while the rupee remains weak.

“The rate cutting cycle would likely be slightly delayed as
the Reserve Bank of India attempts to balance the dilemma
between managing the currency and supporting growth,” Nomura
said in a note last week.

When markets become unruly, the RBI typically first resorts
to light intervention to quell speculative behaviour, before
pulling administrative levers if the rupee continues to move
sharply.

That might include telling exporters to immediately convert
50 percent of their overseas earnings to rupees – a measure
taken last year – and asking importers to stagger dollar
purchases.

The RBI could also supply dollars to oil importers to stop
lumpy payments adding to pressure on the rupee.

The government could help by, for example, raising limits
for overseas investment in domestic debt, and opening the
defence and telecom sectors to more foreign investment, but
pensions and insurance sector reforms remains stalled and it is
hard for Prime Minister Singh to push through contentious
measures.

That leaves the RBI to hold the line.

“Short-term steps might help to stabilise the rupee but
would be insufficient if the global tide washes over,” said
Radhika Rao, an economist with DBS in Singapore.

(Additional Reporting by Rajesh Kumar Singh in NEW DELHI and
Suvashree Dey Choudhury in MUMBAI; Editing by Rafael Nam and
Simon Cameron-Moore)