Mumbai : India's rupee completed the worst week in more than a year as concerns Europe's debt crisis will worsen spurred an exodus from riskier assets and bolstered demand for the dollar.
The currency touched a two-month low yesterday as the Bombay Stock Exchange's Sensitive Index had the steepest weekly slide since October. Greece's Finance Minister George Papaconstantinou said the nation has insufficient funds to pay 8.5 billion euros ($10.8 billion) of debt coming due this month, while Moody's Investors Service said Europe's fiscal crisis may threaten banks in Portugal, Spain, Italy, the UK and Ireland.
"The global financial-market turmoil is having its effect here," said Sudarshan Bhatt, chief currency trader at state- owned Corporation Bank in Mumbai. "Basically, the European debt concerns and the collapse in stocks have unnerved currency markets. The rupee will remain volatile."
The rupee dropped 0.4 per cent yesterday to 45.48 per dollar at the close in Mumbai, taking its loss last week to 2.5 per cent, the most since February 2009. The Indian currency dropped as low as 45.725 earlier, the weakest level since March 5.
Bets on weakening
Offshore forwards signalled traders increased bets the rupee will weaken in coming months. The contracts indicated the currency will drop to 45.60 to the dollar in a month, compared with expectations of 45.44 Thursday. Forwards are agreements in which assets are bought and sold at current prices for future delivery.
Non-deliverable contracts are settled in dollars rather than the local currency.
The rupee also weakened after former central bank governor Bimal Jalan said India should tax foreign capital inflows into the equity market that stay invested for less than two years to protect its financial system.
Reserve Bank of India Governor Duvvuri Subbarao said on April 26 India "may well employ" some form of capital controls. Taiwan central bank Governor Perng Fai-nan said last week emerging markets should consider limits. Indonesia has studied the issue and Brazil imposed a levy last year.
The rupee pared losses on speculation the RBI will buy the currency to limit volatility in the exchange rate. Central banks arrange sales or purchases of foreign currencies to influence exchange rates.
An increase in the rupee's one-month implied volatility rate signalled traders expect wider swings in the exchange rate. The gauge reached a two-month high of 10.2 per cent yesterday. The indicator of expected currency swings is quoted by traders as part of pricing options.
