Indian rupee leads Asia FX slide on profit-taking

May 27 2014, 12:47 IST
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SummaryThe Indian rupee led losses among emerging Asian currencies on Tuesday as investors took profits amid weaker regional stocks even though the European Central Bank chief Mario Draghi increased expectations of more monetary policy easing.

The Indian rupee led losses among emerging Asian currencies on Tuesday as investors took profits amid weaker regional stocks even though the European Central Bank chief Mario Draghi increased expectations of more monetary policy easing.

The rupee fell as India's new Prime Minister Narendra Modi named his cabinet, with some analysts seeing potential for policy conflict between ministers wanting faster economic growth and the Reserve Bank of India, which wants to tame inflation.

Modi picked Arun Jaitley as finance minister, tasking his close party colleague with reviving investment in an economy that has been growing at its slowest in a decade.

Jaitley said that he would focus on bringing down fiscal deficits and tackling high inflation in Asia's third-largest economy.

Credit Agricole CIB's senior economist and strategist Dariusz Kowalczyk, however, said Jaitley had said his priorities will include attracting foreign investment and lowering borrowing costs.

"Such a stance is positive for INR asset prices but also indicates potential for conflict with the RBI," said Kowalczyk.

"Thus, while attracting capital inflows, it also introduces uncertainty regarding FX policy, and is likely to initially be INR-negative," said Kowalczyk in Hong Kong.

Helped by capital inflows in anticipation of Modi's victory, the rupee has risen 4.8 percent against the dollar so far this year, becoming the second-best performing Asian currency, according to Thomson Reuters data.

The central bank has been spotted intervening to stem further appreciation in the currency, traders said.

RBI data released on Monday showed India's current account deficit in the first quarter narrowed to $1.2 billion, or 0.2 percent of gross domestic product.

The rupee's losses came as most emerging Asian currencies eased, tracking weaker stocks.

ECB President Draghi on Monday continued to hint at coming measures, saying the central bank must be "particularly watchful" for any negative price spiral in the euro zone, and that "more pre-emptive action may be warranted."

If the ECB eases monetary policy further, that will cause investors to seek higher-yielding assets in emerging Asian countries, analysts and traders have said.

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