Experts predict another 10% slide in currency

Written by Bloomberg | Updated: Nov 29 2011, 07:16am hrs
The rupee is expected to slide another 10 % even as the government takes further steps to open up the economy to support the currency.

Global funds may be allowed to buy company bonds without restrictions and foreign individual investors could purchase local shares, said Mumbai-based IndusInd Bank. RBI raised deposit rates for NRIs last week and allowed Walmart Stores and Tesco to take majority stakes in retailers. The rupee may drop to 58 per dollar from a record-low 52.73 on November 22 on concern that the countrys current account deficit will widen, according to HSBC.

The 14.2% decline in the rupee, this years worst-performing Asian currency, is stoking price pressures by raising import costs and worsening a slump in government bonds. Yields on the countrys benchmark 10-year notes have risen 90 basis points in 2011 to 8.82%, compared with a drop of 22 basis points in China and 73 in South Korea.

Anything that opens up the economy is positive for growth and risk assets like the rupee, said Tim Condon, the Singapore-based head of Asian research at ING Groep NV. But the origin of the problem is not India , so the rupee and any measures that India takes are hostage to the wider world.

The government has raised the cap on foreign holdings of rupee-denominated debt by 20% to $60 billion, boosted the limit on the interest rates companies pay when borrowing abroad and removed a $100 million cap on inflows of foreign exchange via currency swaps.

There has been very little economic reform in India since the early 1990s, said Condon. So, the agenda is huge and implementing a part of it will be a positive.

The government may consider scrapping the quota system it uses to restrict investment in rupee-denominated bonds issued by local companies, J Moses Harding, an executive vice-president at IndusInd Bank, said. The Securities & Exchange Board of India (Sebi) assigns quotas for bond trading to reduce volatility. Curbs include minimum lock-in periods and mandatory reinvestments.

The Reserve Bank of India may also sell dollars directly to oil refiners to reduce demand for foreign exchange in the currency market, Rohini Malkani, a Mumbai-based analyst at Citigroup, wrote in a note on November 24.

There is also speculation that the government may allow companies to borrow more abroad after Thomas Mathew, joint secretary, finance ministry, said this month that policy makers expect upward pressure on the $30 billion annual limit on the external commercial borrowings.

The government may allow individual foreign investors to directly buy domestic shares, finance secretary R Gopalan told reporters earlier this month.

The rupee slumped for a fourth straight week last week on concern Europes debt crisis will damp demand for emerging- market assets, slowing global growth and sapping revenue for India s government as well as demand for exports. Bloomberg